Introduction to Tax - UVic LSSuviclss.ca/outlines/183-Su_-_Law_345_-_Final.docx  · Web viewZS – Tax – Spring 2015 – Prof. Martha O’Brien. Table of Contents. Introduction

ZS – Tax – Spring 2015 – Prof. Martha O’BrienTable of ContentsIntroduction to Tax......................................................................................................................................... 2

Constitutional Division.............................................................................................................................................. 2What are Taxes?........................................................................................................................................................... 2Interpreting Tax Legislation.................................................................................................................................... 3Terminology.................................................................................................................................................................. 3Tax Policy....................................................................................................................................................................... 3Tax Expenditures......................................................................................................................................................... 4

Calculating Income and the Source Concept..........................................................................................4Surrogatum Principle................................................................................................................................................. 6

Interpretation Bulletin IT-365R2 – On Lump Sum Award for Future Earnings................................................8Losses............................................................................................................................................................................... 8Nexus................................................................................................................................................................................ 8

Residence........................................................................................................................................................... 9Deemed Residence................................................................................................................................................... 11Part-Year Residence................................................................................................................................................. 11Tax Treaties................................................................................................................................................................ 12

Canada-US Tax Treaty Article IV – On Residence.........................................................................................................13Canada-UK Tax Treaty, Article 4 on Fiscal Domicile...................................................................................................13Income Tax Folio S5-F1-C1.....................................................................................................................................................14

Departure Tax (Consequences of Immigration and Emigration).............................................................14Provincial Residents................................................................................................................................................ 15Residence of Corporations..................................................................................................................................... 15Canadian Taxation of Non-Residents................................................................................................................. 16

Income from Office or Employment....................................................................................................... 17Employee vs. Independent Contractor.............................................................................................................. 18

Using a Corporation to Avoid EME/IKor Problem and the PSB Rule...................................................................20Benefits, Reimbursements, and Allowances....................................................................................................21

IT-470R – Fringe Benefits vs. Privileges...........................................................................................................................22Valuation of Employment Benefits......................................................................................................................................23Allowances – s. 6(1)(b).............................................................................................................................................................24

Special and Remote Worksites Exemption – s. 6.6 & IT 91-R4..............................................................................................25Automobile and Travelling Allowances Exemption...................................................................................................................25

Deductions for Employment Income.................................................................................................................. 26

Income from Business/Property............................................................................................................. 29Canadian Controlled Private Corporations......................................................................................................29Organized Activity and Gambling........................................................................................................................ 30Pursuit of Profit......................................................................................................................................................... 31Adventure of Concern in Nature of Trade – Business vs. Capital Gain....................................................32

IT-459 – ACNT.............................................................................................................................................................................. 34Income from Property............................................................................................................................................. 35

Interest Income............................................................................................................................................................................ 36Rents and Royalties – s. 12(1)(g).........................................................................................................................................37Dividends........................................................................................................................................................................................ 38

Deductions for Income from Business or Property.......................................................................................39Income Earning Purpose Test...............................................................................................................................................40Deduction of Personal or Living Expenses......................................................................................................................41

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Deduction of Interest Expense..............................................................................................................................................44Policy Reasons for Denying Deductions (Illegal/Unethical Conduct).................................................................46Capital vs. Current Expenditures.........................................................................................................................................47

Capital Gains & Losses................................................................................................................................. 49Policy for Preferential Taxation of Capital Gains...........................................................................................51Identical Properties................................................................................................................................................. 52Part of a Property...................................................................................................................................................... 52Disposition and Proceeds of Disposition..........................................................................................................52Deemed Dispositions and Deemed Proceeds..................................................................................................53

Lottery Winnings........................................................................................................................................................................ 53Ceasing/Becoming Resident of Canada.............................................................................................................................53Gifts and Sales Below FMV to Non-Arm’s Length Persons.......................................................................................53Deemed Disposition on Death...............................................................................................................................................55

Rollovers for Spouses/Common Law Partnerships.......................................................................................55Inter Vivos Transfers..................................................................................................................................................................55Transfer and Rollover Upon Death – s. 70(6).................................................................................................................56

Personal Use Property and Listed Personal Property..................................................................................56Principal Residence Exemption........................................................................................................................... 58

Depreciable Property and Capital Cost Allowance............................................................................60Undepreciated Capital Cost – s. 13(21)..............................................................................................................61Half-Year Rule – ITR 1100(2)................................................................................................................................ 61Recapture: s. 13(1) – Inclusion in Computing Income..................................................................................62Terminal Loss – ss. 20(16) & 39(1)(b)(i)..........................................................................................................62

Introduction to TaxConstitutional Division

1) federal – s. 91(3) – general power to tax2) provincial – s. 92(2) gives taxing in province for raising revenue for prov.

purposes, and s. 92(9) gives authority for shop, salons, and other licences to raise revenue for prov./local/municipal purposes; only allowed to set direct taxesa) direct tax = demanded from the person who it is intended to pay itb) indirect tax = demanded from one person in the expectation that he

shall indemnify himself at the expense of anotherWhat are Taxes?

1) things other than taxa) fines and penalties – punishments for acting contrary to the law and are

meant to deter; while this can be seen as a tax, the goal is not to generate revenue, but to deter certain behaviour

b) royalties – charges by gov. in exchange for the right to exploit property – ex. royalties on gas and minerals extracted from land; acts like a licence, but is not compulsory

c) fees – sometimes taxes are disguised as fees – ex. medical services premium, which is really a regressive tax

d) prices – you get something in return, and thus is not really a tax2) attributes of taxes

a) base – ex. income, wealth, consumption

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b) TP or tax filing unitc) rated) periode) collection and administration

3) progressive vs. regressive taxationa) progressive = higher you go, the more you payb) regressive = opposite of progressive; very rare

i) however, taxes can have a regressive effect – ex. 5% tax for a person who makes $5000 is very high, but very low for someone making half a million and who saves most of that income

c) flat = the % charged does not changeInterpreting Tax Legislation

1) “Taxpayers are entitled to rely on the clear meaning of taxation provisions in structuring their affairs. Where the words of a statute are precise and unequivocal, those words will play a dominant role in the interpretive process” –LeBel J. in Placer Dome Canada Ltd v Ontario (Minister of Finance), SCC 2006, at para. 21

2) but if meaning is ambiguous, then context and purpose begin to play a bigger role

3) there is still a presumption in favour of TP, but it is residual and only applies in exceptional cases where the ordinary principles of SI do not resolve the issue (ex. Fries: SCC held strike pay not income and therefore not taxable b/c statute was ambiguous)

Canada v Fries, SCC 1990 - income from unenumerated sources was taxable under the general provision of ITA s. 3(a)Held: strike pay is not income; SCC said they could not interpret anything in the ITA and applied residual presumption in favour of TP and excluded strike pay from income

Terminology1) GAAP (“Generally Accepted Accounting Principles”), now integrated with

IFRS (“International Financial Reporting Standards”), are rules for financial accounting in Canada, and are contained in the Handbook of the Chartered Accountants of Canada courts not bound by them

2) cash vs. accrual accountinga) cash = TP includes the amounts they have actually receivedb) accrual = include not just amounts received, but amounts receivable;

also applies to payables and paid amounts3) notice of assessment = what you get if you file your taxes4) normal reassessment period = 3-4 years

Tax Policy1) equity

a) vertical equity: redistribution of wealth; that non-equals be appropriately treated differently

b) horizontal equity: those who have the same amount should pay the same amount of tax

2) neutrality: tax shouldn’t affect too much of your personal decisions; gov. should tax every dollar the same

3) simplicity: which means it should be….a) comprehensible

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i) ex. while ITA is not simple, most people understand income tax in general

ii) a tax system that is irrational is bad b/c it is hard to administer, and it is hard to get people to comply with it

b) certaini) imposed by lawii) should be able to determine in advance the consequences of your

commercial/economic/other decisionsiii) it should not be within the tax collector’s discretion to decide what

the tax consequences of TP’s actions arec) convenient

i) for the TP(1)if too difficult to comply, people will just stop trying(2)the costs of compliance should not be so exorbitant so that it

takes a huge part of the tax cake – since TP allowed to deduct accounting legal fees and what TP pays accountant

ii) for administration(1)should not be too costly to administer tax system – if gov. spends

too much time employing/training auditors waste of time and money

(2)taxes should be difficult to avoid or evade, b/c for everyone who cheats, those who do not cheat have to pay more(a)n.b. avoidance ≠ evasion

(i) avoidance = tax minimization; structuring affairs to minimize tax liability, which is perfectly legal

(ii) evasion = fraud; not reporting income that is taxable4) global competitiveness

a) Canada thrives upon trade and so we have to respond to what other countries are doing

b) having capital in the countries grows the economy, and thus you want people to keep their money here

Tax Expenditures1) tax expenditures = provisions that, rather than measuring income in an

objective way, are meant as an incentive to certain behaviours/expenditures

2) evaluating tax expendituresa) what gov. objective is being served by the tax expenditure?b) assuming it is serving some valid gov. goal, are the benefits distributed

fairly?c) is the program target efficient?d) does the program avoid causing any unintended distorting effects?e) are the admin. and compliance costs of the program reasonable?f) can the objective be better served by some other gov. policy, such as a

direct spending program, or gov. reg., or public provision?i) those who favour the tax system to deliver subsidies argue that tax

expenditures tend to be simpler in design, involve less bureaucratic discretion, encourage private decision-making, use an established framework of admin., and involve less stigma than direct gov. hand-

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outsii) those who oppose the tax system to deliver subsidies argue that all

the advantages claimed are instead advantages of automatic cheque-writing programs

Calculating Income and the Source Concept1) calculating income – s. 3 – take the TP’s

a) income from all sources [enumerated/unenumerated, inside/outside Canada]; +i) net income from employment and office (s. 5) = inclusions (s. 6) –

limited deductions (s. 8)ii) net income from every business (s. 9) = inclusions (s. 12) –

deductions (s. 18)iii) net income from property (s. 9) = inclusions (s. 12) – deductions ( s.

18)iv) net income from other sources (s. 56)v) excluded income is ignored (s. 81)

(1)s. 81(1)(a) – statutory exemptions(2)s. 81(1)(g) – compensation by Germany for Nazi war crimes

b) TCG (s. 38(a)) + net gain from LPP (s. 41(1) (cannot be negative, s. 41(2)(b)(iii)) – ACL (only if it is a positive amount, s. 38(b))i) CG = POD – ACB CG × 50% = TCG

c) deduct anything that TP may claim under subdivision (e) – these include moving expenses (s. 62), child care expenses (s. 63), legal expenses in respect of retiring allowances (s. 60(o.1)(i)(B)), and others (total cannot be negative)

d) deduct losses from sources: employment – s. 5(2); business/property – s. 9(2) (total cannot be negative)…positive amount is taxable income for the year…negative amount is deemed to be zero

2) s. 4(1)(a) – calculate income & deductions from each source independently3) residents are taxed on worldwide income; non-residents are taxed on

Canadian source income4) source concept = income that has no recognized source is not subject to

tax, and a loss not from a recognized source is not deductiblea) taxable income must have a source (Bellingham); but while the sources

in s. 3(a) are not exhaustive, the courts have been reluctant to recognize unenumerated sources

b) the source does not have to come from the income payor (Bellingham)c) to be taxable, should have some “income feature” (Cartwright and Sons)

5) the following indicia show no source : (Cranswick)a) TP had no enforceable claim to the paymentb) no organized effort on the part of TP to receive the paymentc) the payment was not sought after or solicited by TP in any mannerd) the payment was not expected by TP, either specifically or customarilye) the payment had no foreseeable element of recurrencef) the payor was not a customary source of income to TPg) the payment was not in consideration for or in recognition of property,

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services, or anything else provided or to be provided by TP; it was not earned by the TP, either as a result of any activity or pursuit of gain carried on by the TP or otherwise

6) what is a source?a) s. 3(a) gives the 4 enumerated sources: 1) office 2) employment 3)

business 4) propertyb) s. 56(1) sets out the other sources of income (under subdivision D)

i) some of these other sources are not really a traditional source – such as a pension benefit (i.e. it is not really a salary or an investment, but something you get after employment), and scholarships and bursaries

ii) these are revenue that people become entitled to, but may not be connected to any traditional activity for earning income

7) source/income vs. CG/CLa) the capital is the sourceb) the income may come from the source

8) recognized excluded categories of incomea) gambling gains (unless business of gambling) (LeBlanc; Luprypa)b) punitive damages (Bellingham)c) gifts and inheritancesd) residual category of windfall gainse) strike pay (Fries)

Bellingham v The Queen, FCA 1996 – the source of income does not have come from the payorFacts: T sees land she thinks is being sold for too cheap, so she buys it; Town expropriates the land; Town offered money but T said it was too low; went to land compensation board, who gave her 6× the amount Town offered; since the Town owed her money – that is debt – which is treated as income from property; but extra $114k money was the problem, b/c it was not compensation to TIssue: what is the $114k classified as?Held: the $114k is not taxable, as it is not viewed as income from a source – it is instead a punishment on the Town for trying to rip T off; this kind of money is more like a punitive damage award, which puts it in the category of a windfall; “The critical factor is that the punitive damage award does not flow from either the performance or breach of a market transaction”; s. 3 clearly says there may be other sources of income other than the ones enumeratedO’Brien: ex. of gambling – not a steady source of income as it is not productive, and thus it has never been taxed; ex. gifts and inheritances – also a transferable money, and thus it is not productiveCartwright and Sons Ltd v MNR, TABFacts: Cartwright and Sons sued Carswell; Carswell had been printing Cartwright’s law list; one year Carswell had its own law list (competing with Carwright); Carwright sued for CR infringement; settled out of court and made an extra $7k payment unidentifiedIssue: what was the $7k?Held: it was punitive payment, which is not taxable as it “has no income feature”The Queen v Cranswick, FCA 1982 – set out several indicia which could be applied when assessing whether a receipt constitutes income from a sourceFacts: US company had a Canadian subsidiary, and the US co. controlled more than 50%; Cranswick has shares in the Canadian co. (probably under 0.1%); one day Cranswick gets cheque from US co.; CRA wants to tax that income, but Cranswick argues that money is a windfall as he has no relations to the US co.Held: the payment is a windfallCurran v MNR, SCC 1959Facts: T received $¼ million from Brown; Brown wanted T to leave his job and come to work for Federated Petroleum, controlled by Brown; the funds were provided by another company that Brown controlled, called Culta Assets; T never became an EME of Brown at either Federated or Culta; Brown and T had 2 Ks: 1) consideration of loss of pension rights with old company and other employment opportunities, gave $250k; 2) employment agreement between T and FederatedIssue: what is the $250k? (T argues $250k is non-taxable, as it is like a capital payment to compensate T for giving up rights that he is in the process of accruing related to his personal capacity to earn

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income)Held: the $250k is taxable within the meaning of s. 3(a), as it is a quid pro quo for T coming to work for FederatedDissent: the $250k can be divided up compensation for T losing the capital advantages; services that T was going to provide to FederatedO’Brien: at this point, T was not EME of Federated, and it was also paid from Culta (not Federated) – and yet the majority said it came from a source

Surrogatum Principle1) Surrogatum Principle = if you receive an amount that is replacement for a

taxable amount, then that amount will be taxed the same way as what it replaced

2) test for applying Surrogatum Principle : (Tsiaprailis)a) what was the payment intended to replace? provided the answer is

sufficiently clear…[n.b. “clear” = must be able to apportion the amount; if don’t know what amount is taxable/not none of it would be taxable (Swartz)]

b) would the replaced amount have been taxable in the recipient’s hands?3) TP bears the burden of establishing which portion of a lump sum is not

taxable under the Surrogatum principle (s. 152(8)); it is up to TP to report their income correctly and TP has the burden of proof in a tax appeal and disprove the tax assumptions of the Minister (Siftar)

Schwartz v The Queen, SCC 1996 – first case to recognize Surrogatum in obiterFacts: T was lawyer in law firm; offered in-house in Dynacare; salary and benefits agreed upon; once T withdrawn from the partnership, got letter from Dynacare saying they will not hire T; T retained counsel who got a settlement payment from Dynacare totaling $360k + $40k for retaining counselIssue: how much of the settlement payment is taxable?TC: all of the $360k was primarily for inconvenience, embarrassment, anxiety of having the employment agreed breached before it even started – i.e. it is one lump sum for hurt feelings; cannot apportion them into categoriesFCA: you could allocate the $360k based on what the employment agreement had been $70k for salary, $267k for stock options at the time they were offered, leaves $18k – which is the portion that is non-taxable as compensation for hurt feelingsSCC: it was wrong for FCA to say the TC made wrong finding of fact; TC judgment restored; we do not see pain and suffering awards as being taxable, as we do not recognize a bargain that exchanges pain/injury for incomeSCC on the tax issue, in obiter: Crown argued 2 things, relying on the Surrogatum principle

the $342k was to be treated as income from unenumerated source – it would an amount that would have been paid on K for future employment; i.e. the source = the future employment; thus, this was surrogatum for income he was going to make in the future from Dynacare

the money was retirement allowance, which is included under s. 56(1)(a)(ii); “retiring allowance” defined in ITA and s. 248(1)(b) says damages for loss of office/employment will be retreated as retiring allowances

majority says the Act clearly says unenumerated sources are included, and yet to be found – i.e. leaves it open that other sources can be found, whether or not legislatures adds them

but rather than reasoning if the money can be Surrogatum, the majority gets into if the amount paid to T was a retiring allowance – held that it was not def. of “retiring allowance” is examined and says this is money paid due to loss of office or

employment the question becomes if T had “employment” in the Act, “employment” is defined – means the position of an individual in such a service; b/c

the day T was supposed to work at Dynacare had not occurred when Dynacare terminated the K unilaterally, T was never an EME of Dynacare

since he never had employment, could not lose employment therefore this was not a retiring allowance

since the retiring provision does not catch this situation, should not use the general provision, s. 3(a), to tax this amount

O’Brien: this entire case is wrong; unrealistic to say the majority of $360k was pain/mental suffering; using the general rule to override the specific is also not logical [c.f. Savage]; this was inappropriate

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place to apply SurrogatumThe Queen v Savage, SCC 1983 – the specific provision overrides the general provisionFacts: Savage got $300 from EMP; said this was prize for achievement for passing exams (she took her own time on her own decision); in ITA, prizes over $500 are taxable, but under $300 are not; Crown said this was not prize but benefit of employmentHeld: this is both, as “benefit” is defined very broadly under the Act; but if we include “prize” under “benefit,” the provision on “prize” would be meaningless; thus, prizes shall be excluded under benefitsTsiaprailis v The Queen, SCC 2005 – the test for SurrogatumFacts: T in car accident, badly injured and could not work anymore, had to go on long-term disability insurance; insurance plan is group policy paid by EMP; after a year, insurance company said they do not think she is disabled any longer and she was cut off from benefits (was receiving $746 a month); T argued she was still disabled; ultimately they settle for lump sum of $105kIssue: is T taxable on the part of $105k that is supposedly replacement for accumulated insurance payments?Held: can apportion the payment – taxable the lump sum includes

past benefits + interest – she admitted this was part of the settlement all benefits she would be entitled to until age 65 (when insurance ends), discounted to the time

of lawsuit s. 6(1)(f) – if you receive period payment of benefits under a sickness/accident/disability insurance

plan, it is included as an income and is not an insurance benefit argument = $36k is replacement for amounts payable periodically under a disability insurance

plan, and thus tax authorities say this is taxableThe Queen v Antonija Siftar, FCA 2003 – TP, who has the greater knowledge of his/her own affairs, bears the burden of establishing which portion of a lump sum is not taxable under Surrogatum, which is same as ITA s. 152(8) – it is up to the TP to report their income correctly; TP has the burden of proof in a tax appeal and disprove the tax assumptions of the Minister

Interpretation Bulletin IT-365R2 – On Lump Sum Award for Future Earnings1) not taxable2) but you will probably invest that award, and the income on that money will

be taxable, as it is income from property3) even if you are compensated penny for penny for lost wages up until the

time of your trial/settlement, you probably will not be taxed on it4) case law says it is lost capacity to earn that is compensated for5) O’Brien: here, does not make sense – Surrogatum should be applied

a) the problem is if you have EMP-provided disability insurance, and you lose wages and start to receive periodic payments – you get taxed on them

b) yet if you do not have EMP insurance and you claim against ICBC, and you get compensated for lost wages/future earnings – you are not taxed on the amount

c) this is problematic as you would surely rather sue in court than claim disability insurance

Losses1) losses also must have a source to be deductible2) loss carryovers

a) carryover period and deductibility rules differ depending on the source of loss

b) non-CLs (i.e. income losses): s. 111(1)(a) – can carry over back 3 years or forward 20 years

c) farm losses and restricted farm lossesi) ss. 111(8) and 31 – may be carried back 3 years and forward 20

years in accordance with para. 111(1)(d) & (c)

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ii) farm losses may be deducted against income from any sourceiii) restricted farm losses are only deductible from farming income

d) net CLs: s. 111(8) – can carry back 3 years and forward indefinitely, but are deductible only from TCGs (s. 3(b))

Nexus1) no nexus between income and TP = not taxable2) nexus = control, enjoyment, or ownership of the amount

a) normally, the person who receives the money is the person taxable on it – but there are exceptions

b) the TP must have some right to that income/control over it or to have enjoyed/spent it

3) illegal actsa) TP must have personally received and benefited from the amount to

have a nexus; where TP is a victim of an unauthorized act by a person from which improper conduct has received a benefit, the T cannot be have said to have “received” amount and thus he does not get a taxable benefit (ex. Field – n.b. this case is not precedent b/c it was an informal procedure case)

b) fraudulently acquired funds , not only through EMP/EME relationship, but also as income from an illegal business may be taxable; one would look at the circumstances considering the behaviour of the TP, the intention to repay funds, and the manner in which the amount was held by the TP (Buckman)

c) CRA determines illegal income via net worth assessments (s. 152(7))d) that assessment is binding until the TP overturns it on appeal (i.e.

burden on TP to prove otherwise) (s. 152(8))Peter D Field v The Queen, TCC 2001 – T must have personally received and benefited from the amount to have a nexus; where the T is a victim of an unauthorized act by a person from which improper conduct has received a benefit, the T cannot be have said to have “received” amount and thus he did not get a taxable benefitFacts: estranged wife fraudulently withdraws RRSP funds into joint account and then pockets money; T fights the assessment as he did not “receive” (s. 146(8)) any of the funds and should not be taxedHeld: where T is a victim of defalcation by another, it cannot be the law that the victim in the meantime must pay the applicable amount of income tax on the unauthorized withdrawal and be compelled to pursue the offender in the courts over a period of years; T did not receive any benefits out of or under the RRSPO’Brien: T did receive a benefit in a way – he received the deduction from the fundsBuckman v MNR, TCC 1991 – fraudulently acquired funds, not only through EMP / EME relationship, but also as income from an illegal business may be taxable (realities of the situation and not the principles of GAAP determine whether unauthorized amounts are taxable)Facts: T was a lawyer who embezzled funds from his clients and was assessed income for his unreported misappropriations; T argues embezzled funds were not from a particular source and thus not income; argues that embezzled funds would not show as profit under GAAP (liabilities rather than assets) and therefore would not be applicable as business income; he is not strictly the legal owner (argues he “borrowed” the funds instead of stealing them) so he should not have to pay taxes – argues no nexusHeld: there is a nexus and T should pay the taxes The Queen v Poynton (ONCA) held that fraudulently obtained funds from employment income are

taxable strict legal ownership is not the exclusive test of taxability; court in determining what is income for

taxation purposes must have regard to the circumstances surrounding the actual receipt of the money and the manner in which it was held (it may not be taxable if there is an intention to repay)

here, T clearly wished to use the funds for his own purposes and never had an intention to repay them

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Residence1) Canada taxes on basis of residence and source upon worldwide income (s.

2(1))a) c.f. non-residents taxed on Canadian source income (s. 2(3)) and

passive income (s. 212)2) from an international law and comity basis, Canada limits itself to what it

can collect – thus ITA defines TP as resident of Canada, and in tax treaties, Canada agrees how it will allocate the tax between the country of residence and country of source to avoid double taxation

3) s. 250(3) – resident means “ordinarily resident”a) ordinarily resident = not present physically on a day to day basis

currently, but would in ordinary circumstances be resident in Canada4) residence is usually a QOF – the more ties a TP has within Canada, the

more likely TP will be considered a resident (Denis M Lee)a) residency is chiefly a matter of the degree to which a person in mind

and fact settles into or maintains or centralizes his ordinary mode of living with its accessories in social relations, interests and conveniences at or in the place in question; it is possible to be a resident of multiple countries and be subject to taxes by both (Thomson)i) but intention of TP does not matter in determining residence (Denis

M Lee)b) immigration status is not determinative of tax residency (Denis M Lee)c) indicia that could indicate residency in Canada (Denis M Lee)

i) regularity and lengths of visits in the jurisdiction asserting residenceii) ties with the jurisdiction vs. ties elsewhereiii) permanence or otherwise of purposes of stayiv) ownership of a dwelling or rental of one in Canada on a long-term

basisv) residence of spouse/children/dependent family (although TP can

establish residence elsewhere even if wife/children in Canada – Shih)vi) membership within Canadian churches or synagogues, clubs, unions,

and professional organizationsvii) holding credit cards issued by Canadian financial institutions and

other commercial entitiesviii) telephone listing in Canada, mailing address, and stationary,

including business cards, showing address in Canadaix) Canadian bank accounts other than non-resident accountx) driver’s licencexi) frequent trips to Canada for social or business purposesxii) filing income tax return as a Canadian residentxiii) ownership of Canadian vacation propertyxiv) employment in Canada

Thomson v MNR, SCC 1946 – residency is chiefly a matter of the degree to which a person in mind and fact settles into or maintains or centralizes his ordinary mode of living with its accessories in social relations, interests and conveniences at or in the place in question; it is possible to be a resident of multiple countries and be subject to taxes by both; a person must always be resident somewhereFacts: T born in NB in 1872, lived there until age 51; had dispute over tax assessment; in 1923 sold his home and headed off to Bermuda (no income tax) to get UK passport; then went to US; in 1932 he

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started coming back to NB every summer for a long period of 5-6 months (his argument was that his wife wanted to come back); he built a nice house, and when came to Canada would bring his wife, children, servants, cars etc.; when he was not in NB he kept the house ready for himHeld: for purposes of income tax legislation, there is a presumption that every person has at all times has

a residence – assumed abode somewhere he never established a real residence in Bermuda – was only there to get passport

n.b. this is an ex. that his Bermuda passport did not make him resident of Bermuda US regarded him as non-resident from 1940-1941, and taxed him as resident in 1942 ordinarily resident means in the course of the customary life of the person concerned, and is

contrasted with occasional/casual residence T was ordinarily resident in both NB and US during a period in the 1940s, as that where he resided –

nothing in Canadian law that prevents him from being ordinarily resident in 2 places distinguishes sojourning vs. residing

sojourn = nature of the stay is outside the range of resident/temporary residence/residence for a temporary purpose

if you are sojourning, you are not resident at all there is a presumption that you are resident somewhere

Denis M Lee v MNR, TCC 1990 – immigration status is not determinative of tax residency; residence is a QOF and depends on the specific facts of each case – the more ties a T has within Canada, the more likely they will be considered a residentFacts: Lee was electronic engineering; born in UK, holding UK passport; during years at issue, was employed in oil rig outside Canada by non-Canadian company; came and went from Canada as a visitor during this time, as he had a visitor’s visa permitting him to stay from 5-45 days; he deposited his paycheques into Canadian bank account (this is more significant then than now); married a Canadian resident who was wholly dependent upon him for support; his fiancé purchased a house that he gave her money for; he had to guarantee the mortgage debt, as she had no income, even though house was in her name; at this time, he swore an affidavit that he was not a non-resident of Canada at the time the mortgage was given (this is a key fact); he also told the court he had been charged with failure to file a tax return for 1981 (which is criminal charge of evasion) and had been acquitted – he argues that he did not have any of the rights that Canadians should have (ex. stay in Canada as long as they wanted, health insurance, come and go as they please)Held: most critical factors are where you have a home and where your immediately family are while there are other factors like where he attends church, none of them are conclusive intention is not a factor in residence after considering all the relevant factors, T at beginning of 1981 was not a resident, but 1982 T was

obviously resident, when he swore he was not a non-resident although marriage can be a neutral factor, in case it is the additional factor that tips the scales –

thus, the day T got married was the day he became resident of Canada (which was partway through 1981) he already had home available to him he moved from being engaged to married

O’Brien: the judge can look with hindsight and the TP, who is trying not to be a resident, may be in a hard position; cannot assume that everything that happened after 1981 was planned (at the time, he might not have planned to stay and be a resident) makes it an uphill battle sometimes for TPs trying to argue non-residenceShih v The Queen, TCC 1962 – T can establish non-residence even where his spouse and dependent children live in CanadaFacts: T lives and works in Taiwan even though his wife and children live in family home in Regina; spent 20% of his time in Canada; his aged parents lived in Taiwan and had membership in tennis club and church in Taiwan

Deemed Residence1) s. 250(1) – deemed residence as a matter of law if was resident in Canada

immediately prior to appointment/employment in Canada +…a) if sojourning in Canada 183 days or more (and they add up each stay)

(s. 250(1)(a))b) was, at any time in the year, member of Canadian forces does not

matter if you were stationed abroad ( s. 250(1)(b))c) was ambassador, minister, servant of Canada (i.e. employed by prov. or

feds) (s. 250(1)(c))11

2) sojourninga) being present for the day but returning home at night does not count –

to sojourn, must stay overnight (R&L Foods)b) includes

i) holiday trips in Canadaii) unexpected and unusual stays – ex. miss a flightiii) n.b. S5-F1-C1 1.32-1.33: sojourning = overnight stay, but if you come

to Canada on Saturday and go back Sunday, CRA will count that as 2 days

R&L Food Distributors Limited v MNR, TRB – commuting and working in one country but returning to one’s permanent residence daily is not sojourning as it is not making a temporary stayFacts/Background: real issue = status of the corporate TP; this is the corp. challenging the status assigned to it by the MNR; if R&L were a CCPC, it would have been allowed a very beneficial rate of tax; TPs wanted to argue that they held the majority of shares, and if they were resident, R&L would be a CCPC; for CCPC, we look at who has control of the shareholding; in R&L, there were 3 issued shares (small company), and they all have votes; if more than 50% of votes held by Canadian residents, it will be CCPC; 2 of the shareholders, Ben and Joseph, commute everyday to work in Windsor, and so they spend more than 183 days in Canada every year; they file income tax return in both Canada and US, and did not move to Canada due to family decision to stay in Michigan; no business interest in Canada; no home in Canada; argument = b/c they spend more than 183 days in Canada, they are deemed to be Canadian residents in Canada throughout the year thus R&L is a CCPCIssue: is returning to home at night and journeying to work at day count as sojourning?Held: not sojourning – being present for the day but returning home at night does not count; probably the night when they stayed overnight, and their holidays in Toronto could count as sojourning; i.e. to sojourn, must stay overnightO’Brien: if deemed residence, it is irrelevant if they are ordinarily resident; so deemed resident is totally different from ordinarily resident; under ordinary resident, do not count the days but use Thomson test; if not ordinary resident, must count the days; n.b. one of things CRA looks at is if you have a prov. health care card – to be entitled, must be resident in the prov.

Part-Year Residence1) s. 114 – sets out a rule for someone who becomes/ceases to be a Canadian

resident sometime during the year take the individual’s income for the whole year, but for the period they were non-resident, only count the income they would have been taxed as a non-resident

2) taxation year for an individual is Jan. 1-Dec. 31 ( s. 249(1)(b))3) TP has burden of proof to establish a factual severance of residency

(Schujahn)4) in order to establish part-time residency in Canada, the facts must disclose

either that the individual commenced/ceased to reside in Canada (Schujahn)

5) physical presence not necessary for TP to be ordinarily resident; where one has a temporary absence from Canada, even for an indeterminate length of time, may not sever his ordinarily resident ties to Canada for tax purposes (KF Reeder)

Schujahn v MNR, ExCt 1962 – TP has the burden of proof to establish a factual severance of residency; per s. 114, in order to establish part-time residency in Canada, the facts must disclose either that the individual commenced to reside or ceased to reside in CanadaFacts: T came to Canada, sent by US company with subsidiary in Canada, on an indefinite cases; so wife and child went with T, and T became ordinary resident; however, on Aug. 2nd 1957 was transferred back to Minneapolis, and yet left his wife and son in Toronto, only for the purposes of selling the house before they joined him; left small sum of money and a car with his wife; between Aug. and end of 1957, he passed through Toronto for business trips, and spent Christmas in Toronto; T argues: as of Aug. 2nd 1957 he ceased to be resident of Canada, and therefore should not be taxed on worldwide income from that date on; if he is successful, then will only be taxed on worldwide income from Jan. 1-Aug. 2, after which could only tax on Canadian income, which he was have none

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Issue: did T sever all ties since Aug. 2nd 1957? [n.b. courts tend to be more open to the idea that someone severs ties to Canada if they were not always a Canadian resident – as it is the case here]Held: yes, T severed all ties on Aug. 2nd; although T’s wife and son stayed in Toronto, it was for a limited purpose; T’s returns to Canada after Aug. 2nd were minimalO’Brien: notice he was not deemed to be resident in Canada throughout the year although more than 183 days – he was not sojourning, he was resident for part of the year; normally having a home means a very significant tie, but in this case the court was open to the idea that T had moved in every significant way back to the USThe Queen v KF Reeder, FCTD 1975 – physical presence not necessary for TP to be ordinarily resident; where one has a temporary absence from Canada, even for an indeterminate length of time, may not sever his ordinarily resident ties to Canada for tax purposesFacts: year in issue is 1972; T born in Canada, trained in Canada as civil engineer and married to Canadian; lived in Ontario until March 1972, but then got job with Michelin Canada and was transferred to France for initial training period potentially for more than 6 months (and if he stayed for more than 6 months, company would pay for his family to join him overseas); stored car in NB, stored stuff in Ontario; had bank account in New Glasglow, but not in France; Michelin Canada paid his salary into account in New Glasglow; child born in France in July; went to Germany to work for a month since plant in France was closed in Aug.; at end of Nov. went back to Canada; so overall absent from Canada for a little over 8 months; he paid no income tax to France or Germany; T’s argument: while he was in France and Germany he was a non-resident in Canada, and so does not have to pay tax in CanadaIssue: did he cease to be resident in Canada when he headed France? so was he a part-year resident?Held: no – T remained a Canadian resident throughout the time he was in France and Germany, as he was going abroad for a temporary period, even though the exact amount of time was not established; the job he had in Canada was the only reason he went to FranceO’Brien: this illustrates how it is more difficult for someone who was always a Canadian to demonstrate they severed ties, although the main reason for the decision was that the trip was always meant to be temporary

Tax Treaties1) tax treaty must be enacted by parliament, given royal assent and brought

into force2) if inconsistency between law in Canada and law in tax treaty, tax treaty

prevails3) there is a tiebreaker rule in each of the treaties, which would arise if you

were resident in Canada under ordinary resident rule, and deemed to be US resident under rule similar to sojourning rule would pay double tax on worldwide income

4) most of our treaties follow one formula, and the US one is the most idiosyncratic

5) n.b. you can apply for tax credits to deduct between 2 countries, but that is if you are a non-resident in 1 country – the “avoiding dual tax” problem is to deal with situations where you might be decided as a resident of both countries

6) s. 250(5) – if you are non-resident under a treaty (i.e. treaty tiebreaker has applied to make you a resident of another country), then you are not a resident of Canada (this is a backup rule b/c there were arguments made that you can be resident in Canada for some purposes, and be non-resident for treaty purposes)

Canada-US Tax Treaty Article IV – On Residence1) resident = person liable to tax on that state due to criteria met, like

domicile/resident/citizenship etc. [n.b. US uses citizenship]2) if individual is resident by both states…(the tiebreaker rule) – listed in

descending order of importancea) step 1: permanent home in Canada or US? (permanent = place TP can

go back to if TP wants, at anytime; does not mean forever) (ex. if sublease your apartment to someone, you do not have permanent home, even if you own that apartment)

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b) step 2: if both, look at centre of vital interestsi) close family members very important (spouse)ii) where dependent children areiii) other family members are not that importantiv) source of income, place of jobv) place of personal assetsvi) where investments are

c) step 3: if cannot determine center of vial interests, look at habitual abodei) habitual abode not def., but often comes down to “where do you

spend more time?”d) step 4: if habitual abode in both or neither state, look at citizenshipe) step 5: if citizen of both or neither, authorities of contracting states (i.e.

the IRS and CRA) will decide by mutual agreementi) danger is that TP could be treated as resident of both countries, b/c

both countries will want TP to pay taxesCanada-UK Tax Treaty, Article 4 on Fiscal Domicile

1) UK uses domicile2) if resident under both, go to tiebreaker [very similar to the US-Canada]

a) step 1: look at permanent homeb) step 2: if permanent home in both, look at centre of vital interestsc) step 3: if cannot figure out centre, or no permanent home in either

state, deemed to be resident where habitual aboded) step 4: if habitual abode in both or neither, look at nationality (i.e.

citizenship)e) step 5: if cannot decide from nationality, let tax authorities aside with

mutual agreementSalt v The Queen 2007 TCC 118 – one only applies the tax treaty analysis where T is found to be a resident of 2 countriesFacts: Alcan had home in Canada sent to Australia indefinitely but for at least 2 years; however, terminated after 18 months; him and his wife had leased his QC home and needed to provide 6 months notice to return to home; separated most ties in Canada but maintained driver’s license and bank accounts; claimed AUS tax resident and CAN non-resident; CRA concedes he is AUS resident but also claims he was a CAN ordinary resident so tax treaty rules applyIssue: was he a Canadian resident for tax purposes from Sept 1, 1998 – April 1, 2000?; T submits that even if this Court should conclude that he was ordinarily resident in Canada, he should be deemed not to have been resident in Canada but to have been resident in Australia by virtue of the tie-breaker rules found in Article 4 of the Canada-Australia Tax ConventionHeld: non-resident of CAN; under the tie-breaker rule T is deemed to have been a resident solely of AUS b/c that is the country in which he had a permanent home available to him; the evidence does not suggest that T had a permanent home available to him in CAN during his stay in AUS; court assumes his CAN residency and applies s.250(5); as T could not access QC home, court determined no permanent home so he was deemed non-resident of CANO’Brien: judge made a reasoning mistake here – you only go straight to the treaty when under domestic law T is resident of both countries – cannot go to the treaty right away

Income Tax Folio S5-F1-C11) resident: leading decision on the meaning of resident is Thomson2) ordinary resident: in Thomson, Estey J. held that, “one is ‘ordinarily

resident’ in the place where in the settled routine of his life he regularly, normally or customarily lives”

3) 1.10 factual residence – are you resident as a QOF? [not a legal term, but a term CRA made up to explain to layman ordinarily resident]

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4) 1.11 most significant residential ties:a) dwelling place (or places);b) spouse or CLP; and

i) but if separated from them, this is not a significant tiec) dependents

i) but if children grown up, not a significant tie5) 1.14 secondary residential ties

a) personal property in Canadab) social ties with Canada (friends, clubs, siblings etc.)c) economic tiesd) immigration statuse) hospital insurance and coveragef) driver’s licenceg) a car registered in Canadah) a seasonal dwelling placei) Canadian passport (i.e. citizenship)j) memberships in Canadian unions or professional organizations

6) 1.17 – 2 year rule gone – used to be that if you left for 2 years or more, you severed your ties; this was not said ever in case law, but CRA took the position

7) 1.23 – if TP was resident in another country prior to coming to Canada, and leaves to re-establish that residency, then date TP becomes non-resident is date TP physically leaves Canada

8) 1.32 and 1.33 – the sojourning rulea) sojourning = to be temporarily presentb) the CRA considers any part of the day to be a day, in counting the 180

daysc) agree with R&L Foods that commuting and going back to place of

dwelling is not sojourning9) 1.46 – on permanent house test to use during tiebreaker rule in treaties10) 1.50 – on centre of vital interest test

Departure Tax (Consequences of Immigration and Emigration)1) only applies to individuals, not corporations 2) emigration

a) when you emigrate from Canada, for tax purposes immediately before you cease to be a resident, there is a deemed disposition and reacquisition at FMV of all your property other than real property situated in Canada (s. 128.1(4)(b)-(c))i) real property is exempt because CRA is not worried about not being

able to tax that property when it is actually disposed ofb) goal = tax accrued CGs as a resident of Canada and ignore anything

that happens as a non-residentc) n.b. need to ensure you pay departure tax and file it accordingly in last

tax return when leaving Canada, as CRA views you as having no intention to leave Canada if you haven’t paid the departure tax

d) problem = you have to pay tax on realized CGs but you never actually get the cash which results in cash flow issue

3) immigration15

a) when you immigrate to Canada for tax purposes there is a deemed disposition and reacquisition at FMV of all your property other than taxable Canadian property (s. 128.1(1)(b)-(c)) deems your ACB at FMV so it encourages immigration if you have unrealized CGs

b) “taxable Canadian property” includes real property situated in Canada and shares of private corporations (not listed on a stock exchange) that derive their value primarily (50%+) from real property situated in Canada

Provincial Residents1) most prov. piggyback their rules onto the fed. rules, with exception of

Quebec2) BC ITA s. 2(a): must pay tax if resident of BC on last day of tax year – Dec.

31a) test = wherever TP was resident on the last day of taxation year b) n.b. resident ≠physically present (ex. TP could be sojourning)c) income tax must be paid for every individual who is a resident in BC on

the last day of the taxation year + for non-residents that have earned income in BC

d) similar to international residency, TP can be a resident in 2 prov.3) Federal ITA Reg., which applies for prov. taxes

a) 2601 – if an individual resides in a prov. on the last day of a tax year, will be taxed on 100% of Canadian income by that prov.

b) 2607 – a tiebreaker rule where individual resident in more than 1 prov. on last day of tax year, will be deemed to be resident in the prov. that may reasonably be regarded as his principal place of residence

Mandrusiak v. The Queen 2007 BCSC 1418 – determination of provincial principal place of residency based on Thomson factual determinationFacts: chartered accountant from AB starts to work in BC; MNR conceded he was a resident of AlbertaIssue: was T also a resident of BC and where the tie-breaker puts him (where is his principal place of residence, per Regulations 2607)?Held: court went straight to Thomson, which drew heavily on English law for determining residence in an international context, for determining prov. residence; court then examines the facts; where is his money? – in AB, b/c you save money on taxes; overall, looked at where his economic assets were thus, resident of AB

Residence of Corporations1) corp. has separate legal personality, and thus is a separate TP2) however, corps. do not have permanent homes/family etc. that allow you to

tie then to particular country as a resident3) 2 ways for corps. to be resident of Canada

a) common law rule = De Beersi) where central management and control abides (where board of

directors meet and exercises power (make decisions) – De Beersii) in rare cases, it is possible for the board of directors to abdicate the

exercise of its power, so it is actual place of management is where residency is determined – Unit Construction Co Ltd v Bullock, UKHL 1959

iii) a corp. can be located in multiple jurisdiction and have to pay applicable taxes in each – Swedish Central Ailway Co Ltd v Thompson, UKAC 1925

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iv) where dual residency, apply Tax treaties, if applicable – s. 250(5)b) deeming rule = s. 250(4)

i) (a) incorporated in Canada after April 27th, 1965ii) (c) for those before April 27th, 1965, it was incorporated in Canada

and resident or carried on business in Canada (s. 253 – means incorporated under either prov. or fed. statute and a certificate of incorp. established)

4) tiebreaker rules for Canada-US Treaty for corporationa) look at place of incorporation, place of managementb) under US law, tax residence for corp. is solely where they are

incorporated (they do not have place of effective management)c) if resident of both states, (central management and control in Canada,

but incorporated in US) then look ati) created under the laws in force in a K’ing state i.e. if control in

Canada but incorporated in US, the rule says it is a US residentii) if cannot decide by rule, then use mutual agreement, but usually the

first tiebreaker rule solves it5) tiebreaker for Canada-UK Treaty for corp. mutual agreementShih v The Queen, TCC 2002Facts: Taiwan family came to Regina and was joint owner of home; T went back to Taiwan to work but would visit family on regular basis, but never enough to make him a sojourner (i.e. never hit the 183 days limit); his parents were in Taiwan and he as the eldest son were to look after them; he was member of the church and tennis club in Taiwan; he bought a house in TaiwanIssue: is Mr. Shih resident in Canada? (it was clear his wife and 3 sons were resident in Canada, as they had citizenship and was almost never in Taiwan)Held: he was resident only in TaiwanO’Brien: no reason why the court could not have said that T was also resident in Canada, as his residential ties and family are in Canada (he is a permanent resident so he can come and go as he pleases); however, if the court did find this, Canada has no treaty with Taiwan, and thus T would have had to pay tax on his worldwide income in 2 places

Canadian Taxation of Non-Residents1) tax liability for non-residents is based on Canadian source of income –

(usually income from passive sources – i.e. TP does nothing to earn the income) (s. 2(3)) + passive income (s. 212))

2) active taxation of non-residents who was s. 2(3)(a) employed in Canada; (b) carried on business in Canada through a permanent establishment; or (c) disposed of taxable Canadian property on Canadian-source income

3) s. 212 passive property withholding tax: statutory 25% income tax on the recipient of certain types of payments made by Canadian residents to non-residents (s. 212(1))

(a) management fees or administration fees or charges(b) interest – ex. when a Canadian resident company pays interest to its Australian parent company in respect of a loan from the Australian parent: the Australian parent company is subject to 25% withholding tax that must be withheld and remitted by Canadian company [here, arms’ length vs. non-arms’ length matters [i.e. if non-arms’ length pay the tax ](c) estate or trust income – ex. a resident of the UK receiving a share of the income from a Canadian resident estate or trust (perhaps resulting from the will of deceased Canadian resident)(d) rents and royalties(h) pension benefits

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(j.1) retiring allowance [n.b. a retiring allowance is not income from employment in Canada (which would be taxed under s. 2(3)) – it’s income from another source under s. 56](l) payment out of or under a registered retirement savings plan

a) resident corporation paying a dividend to non-resident shareholder must withhold 25% of the dividend (s. 212(2))

b) cannot claim expenses against the 25% c) responsibility on the Canadian resident to withhold and remit the tax on

behalf of the non-resident (s. 215(1))d) the Canadian resident is jointly and severally liable for the tax if it is not

withheld and remitted (s. 215(6))Income from Office or Employment

1) def.: s. 248(1): office, EME, EMP, employmenta) office = the position of an individual entitling the individual to a fixed or

ascertainable stipend or remunerationi) an office-holding may include an elected official, director, executor,

or executrix, judge, tribunal member, chairperson or union officerb) employment = the position of an individual in the service of some other

person (including the Queen or foreign state)c) “servant” or “EME” = a person holding such a position

i) an individual who is retained to provide services to another person = “EME” or “IKor”

ii) IKor = business person, self-EME, and freelancer2) office and employment are taxed identically under s. 3(a) – relevant are ss.

5-7a) s. 5(1) – the charging section; TP’s income from office/employment =

salary, wages, and other remuneration (including gratuities)b) s. 5(2) – loss from office or employment

i) but it is really hard to come up with a loss for office or employmentii) not only do you get paid more than you can deduct, but the Act

specifically limits amount of deduction, which usually ends up as nilc) s. 6 – amounts to be included in income from office/employment

i) s. 6(1)(a) – value of benefitsii) s. 6(1)(b) – personal or living expensesiii) s. 6(1)(c) – directors’ or other feesiv) s. 6(1)(d) – allocations etc. under profit sharing planv) s. 6(1)(e) – standby charge for automobilevi) s. 6(1)(f) – periodic payment of employment insurance benefitsvii) s. 6(1)(g) – EME benefit plan benefitsviii) s. 6(3) – payments from EMP to EME, including (partial) payments in

consideration of agreeing to serve as officer or under K of employment, and (partial) payments for stipulating what EME/officer is not/allowed to do before or after the termination of employment

ix) s. 6(3.1) – amount receivable for covenantd) s. 8 – deductions in computing income from employment; no deductions

are allowed unless can specifically fit into one of the s. 8 provisions

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Employee vs. Independent Contractor1) key differences

a) EMEs are taxed at source; IKors are notb) basis of measurement

i) income from office calculated on cash basis; recognized when “received”; permitted EME expenses deductive when “paid”

ii) income from business calculated on accrual basis; business income is “earned”; business expenses recognized when “incurred”

c) withholding of tax by EMP in s. 153(1)(a) vs. s. 156 no withholding obligation on payments to IKori) an EMP must withhold and remit source deductions for each EMEii) EME have their deductions done at source by their EMPiii) includes EI, and other benefitsiv) if you are an IKor, you have to charge GST/HST on your invoices and

it is an indicator that you are an IKor rather than an EMEv) IKors have to pay double CPP

d) EMEs have almost no deductions (only those permitted under s. 8 allowed) vs. IKors have wider scope to deduct under ss. 9 & 20i) for EMEs, expenses are considered personal consumption decision –

ex. if you get to work, you can either drive an expensive car or walk – one is very expensive and one is free idea is just b/c a person can afford the expensive car, he/she should not get to deduct more

ii) whereas IKor is someone in business for themselves, and thus may have many deductions generally, presumption is that all expenses incurred for purpose of earning income from the business is deductible, unless excluded

iii) does not mean IKor can deduct commuting to work, or cost of their clothing and lunches etc.; however, what is perceived as expense for business is much more relaxed

e) EME gets s. 118(10) – the Canada Employment Crediti) credit received = A × Bii) A = % for the tax year = always the lowest marginal rate = 15%iii) B = the lesser or $1000 or TP’s income from office/employment for

the yeariv) i.e. can get max $150 of deduction for EME incomev) n.b. this is only available for employment, and not income from other

sourcef) reporting period: taxation years

i) s. 249 – taxation year of an individual is the calendar year(1)income from office/employment calculated on calendar year basis

ii) business income calculated and reported on fiscal year basis(1)s. 249.1 – defines “fiscal period

2) 2-step test to distinguish between EME or IKor (Connor Homes, affirming Wiebe Door)a) Determine the subjective intent of each party to the relationship. (Royal

Winnipeg Ballet; Wolf) Determined either by the written K relationship the parties have entered into or by the actual behaviour of each party, such as invoices for services rendered, registration for GST purposes

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and income tax filings as an IKor. If both parties have a common intention, apply 2nd step but giving weight to 1st step as an influence (Wolf). If no common intention, then 2nd step but no influence.

b) Determine whether the objective reality sustains the subjective intent of the parties. Objective reality by applying Wiebe Door affirmed by Saguz: whether the person engaged to perform services is performing them as a person in business on their own account, considering the control over the activity and other factors such as whether the worker: provides own equipment, hires their own helpers, has a degree of financial risk, has a degree of responsibility for investment and management, and the ability for profit in performance of tasks – whose business is it?

c) old testi) control of master over servant (still important)ii) ownership of tools and equipment + where is it performediii) opportunity of profit or loss; and [EMEs can work more hours to make

more money, but IKors can raise his/her rate to earn more]iv) organization / integration test (problem is that it usually indicates

EME) – work is done as an integral part of the business (no longer important)

3) n.b. highly skilled or specialized person in an industry likely to be an IKor (Royal Winnipeg Ballet; Wolf)

Wiebe Door Services Ltd v MNR, FCA 1986 – established updated EME test: ultimate question = whose business is it? (affirmed by 671122 Ontario v Saguz Industries, SCC)Facts: assessment of EI and CPP for door installers; individual Ks with door installers and repairers that did not usually go into the office and had most of their own tools; pay was based on how many jobs they wanted to do themselvesHeld: installers were EMEs because without the installers, there would be no business; “In many cases the question can only be settled by examining the whole of the various elements which constitute the relationship between the parties. In this way, it is in some cases possible to decide the issue by raising as the crucial question whose business is it, or in other words by asking whether the party is carrying on the business, in the sense of carrying it on for himself or on his own behalf and not merely for a superior.”Wolf v The Queen, FCA 2002 – intention of the parties has to be given some weightFacts: Aeronautical engineer (standard IC industry) from US worked for 5 years in MontrealRoyal Winnipeg Ballet v MNR, FCA 2008 – intention of the parties should always be taken into accountFacts: ballet dancers on K, but ballet shoes owned by Ballet CompanyHeld: when interpreting a K, what is sought is the common intention of the parties rather than the adherence to the literal meaning of the words; this does not mean that the parties’ declaration as to the legal character of their K is determinative, nor does it mean that the parties’ statements as to what they intended to do must result in a finding that their intention has been realized; the way K set up was recognizing that this was short term relationship, and that although during the time they were providing services the ballet dancers had to listen to the company, in fact the nature of their skills gives them leeway to leave the company; thus, distance between the ballet dancers and the Winnipeg Ballet was maintainedConnor Homes (1392644 Ontario Inc.), FCA 2013 – new 2 step test to determine worker relationshipFacts: workers in foster and group homes in Ontario; was about EI and CPP contributions rather than income tax, but applies equally to s. 153(1)(a) [that EMP withhold and remit income tax]; T is the corporate EMP; CRA argues T has not complied with obligations to contribute employment insurance contributions and withhold it from EME’s paycheque; each worker had a written K; worker paid on hourly rate and had to submit invoices to get paid + flat rate if worker had to stay overnight, and also paid weekend relief; K was for indefinite time but could be terminated by worker with 2 weeks notice and EMP with cause; each worker responsible for their own CPP, EI and provincial taxes; workers allowed to take on other work other than from Connor Homes – i.e. K made them IKorsHeld: affirms Wiebe Door and Sagaz’s “whose business is it” test some things indicated EME

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hourly rates set by the EMP normally, a K for services is for a short term and not an indeterminate period Connor Homes could only terminate the K for cause, which suggests there could be opportunity

to sue for breach of K if they terminated any of these workers, which is a mark of employment and the mention of being required to contribute their own EI premiums is weird b/c IKors cannot

qualify for EI and you must be arm’s length from your EMP, and you cannot be arm’s length from yourself

Connor Homes had been found to be an EMP in very similar circumstances in earlier cases 2 step test, with overall question being: whose business is it? since Wolf in 2002, the courts are more willing to look at the K between parties and try to determine

the relationship from it however, it is the facts on the ground that matter – that the K says you are an IKor does not

mean you actually are one the CRA is not bound the K, and if the CRA says you are an EME then they will tax according to

the reality test applied

under 1st step, there was subjective intention that the workers would be IKors under 2nd step, the significant degree of control that Connor Homes exercised on the workers –

ex. lack of having to provide own tools, every step of what they were supposed to do being set out in guidelines – meant that they were actually EMEsUsing a Corporation to Avoid EME/IKor Problem and the PSB Rule

1) one of the techniques to avoid the EME/IKor problem, is to interpose a corp., b/c generally a corp. cannot be an EME

2) b/c of this tax planning technique, ITA was amended to include s. 125(7) a) definition of active business specifically excludes a PSB carried on by a

corp.b) CCPC = resident in Canada, shares not listed on stock exchange, not

controlled by non-residents in Canada get special tax ratec) here, we are really talking about CCPCs carrying on PSB

3) test for PSB = s. 125(7) a) an individual performs services on behalf of the corp. (incorporated

EME) or any person related (s. 251(2)) to the incorporated EMEi) related (s. 251) means

(1)an individual related if connected by blood, marriage, CLP or adoption (s. 251(2)); blood relationship means 1 person is the child or descendant of the other (i.e. a child is related to parent, grandparent, great-grandparent etc., and vice versa) or 1 person is the brother or sister of the other (s. 251(6)(a)); in-laws also considered related (s. 251(6)(b) + (b.1))

(2)a corp. related if(a)the person holds voting control, meaning enough shares to

elect the board of directors, normally over 50% (s. 251(2)(b)(i))(b)a person is a member of a related group that controls the corp.

(s. 251(2)(b)(ii)) – a related group means a group of persons, each member of which is related to each other member

(c) any person related to either the person controls it, or any member of the related group that controls it (s. 251(2)(b)(iii))

b) is a specified shareholder (10% or more individually or collectively with non-arms length persons) (s. 248(1)) of the of the corp., andi) all related persons are deemed not to deal at arm’s length (s. 251(1)

(a))ii) for non-related persons it is a QOF whether persons are dealing at

arm’s length – s. 251(1)(c) requires an examination of all of the 21

facts and circumstances existing between the persons at the relevant time; unrelated parties have been held not to deal at arm’s length when(1)there is “a common mind” which directs or controls the bargaining

for both sides (ex. a person and a corp. of which he is a less than 50% shareholder, but a director and officer with influence over the other directors/officers) or

(2)the persons act in concert without separate interestsc) the incorporated EME would reasonably be regarded as an officer or EME

of the person (Wiebe Door/Connor Homes test for EME vs. IKor [see p. 18]) to which the services were provided but for the existence of the corp., unless…

d) the corp. employs in the business throughout the year more than 5 full-time EMEs

4) consequences of being a PSBa) no deduction can be on outlay/expense if corp. gained it for a PSB other

than salary/wages paid in a year to an EME of the corp. (s. 18(1)(p))b) cost of benefits/allowances provided can also be deductedc) negate any advantage of trying to interpose a corp. as it removes CCPC

13.5% tax rate, increasing the rate to 38%5) n.b. the court can sometimes hold that someone is an EME even though a

corp. cannot be an EMEBenefits, Reimbursements, and Allowances

1) s. 5 – includes in the TP’s income any amounts received as salary, wages, gratuities and “other remuneration” (by TP and persons not at arm’s length (s. 6))a) salaries and wages = given their ordinary meaningb) gratuities = voluntary payments made in consideration of services

rendered in the course of a TP’s office/employmentc) other = includes honoraria, commissions, bonuses, gifts, rewards, and

prizes2) s. 6 outlines further specific inclusions for income from office/employment

such asa) amended s. 6(1)(a): inclusion in income of benefits cash and non-cash

such as board, lodging, and other benefits received by TP or a non-arm’s length person in relation to TP (i.e. family) in respect of the TP’s employment

3) benefits = a material acquisition conferring an economic benefit on the EME in TP’s capacity as an EME (Savage)

4) 2 part test for determining taxable benefit (Lowe) under s. 6a) whether the item under review provides the EME with an economic

advantage or something of value that is measurable in monetary terms?i) reimbursements are not taxable benefits as they do not confer an

economic benefit on the TP but rather restore his economic situation he was in before his EMP ordered him to incur the expenses (Huffman)

b) if so, does the primary advantage ensue for the benefit of the EME or EMP?i) was benefit provided in respect of, in the course of, or by virtue of

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employment? (Savage)ii) does not have to be in exchange of services and can be voluntary

action such as outside coursesiii) if it is determined to be a benefit and is not statutorily exempt s.6(1)

(a)(i), it is included in employment income (Savage)5) note that you can catch many things under “benefits” that are not

necessary coming directly from the EMP (ex. Waffle: Waffle took the trip when the president was unable to take it; he was taxed on the value of the trip as benefit from employment b/c if he had not been an EME, he would never have had the trip; the benefit did not come from his EMP but came from Ford Canada, a separate entity – court says this does not matter)

6) policya) we tax non-cash benefits as if they were income from employment b/c

otherwise people would bargain for non-cash benefits – and we are looking for horizontal equity

b) prevents erosion of the tax basec) some things will not be taxed at all – ex. free coffee at work – and the

policy reason is b/c enforcing such a rule will cost more than what CRA will get

IT-470R – Fringe Benefits vs. Privileges1) distinguishes between “fringe benefits” and “privileges” (but this is not the

language used by the courts)2) amounts to be included in income

a) board and lodgingb) rent-free and low-rent housingc) travel benefits [unless an allowance or otherwise excluded from income]d) gifts (including Christmas gifts) [note exceptions below]e) holiday trips, other prizes and incentive awardsf) travel expenses for employee’s spouseg) premiums under provincial medical insurance plants

3) exceptions for prizes and gift sa) non-cash gifts and non-cash awards to an arm’s length EME will not be

taxable to the extent that the total aggregate value is < $500 annually (value in excess of $500 annually will be taxable)

b) non-cash long service/anniversary award may qualify for non-taxable status to the extents its total value is < $500 (value in excess of $500 will be taxable); anniversary awards may not be for less than 5 years of service, or 5 years since the last long service award.

c) items of an immaterial or nominal value (ex. coffee, tea, t-shirts with EMP logo, mugs, trophies) are non-taxable; no monetary threshold but rather a consideration of value, frequency and administrative practicability

4) non-taxable amountsa) an EMP-provided party or social event available to all EMEs if cost is

reasonable in the circumstances (typically, less than $100) (Dunlap)b) trips where the EME’s presence is for business purposes (Lowe)c) loyalty points provided that not converted to cash; not indicative of an

alternative form of remunerationd) subsidized meals provided that the EME pays a reasonable amounte) distinctive uniforms, special clothing and cleaning costs (Huffman)

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f) transportation to the work site that the EMP provides directly (e.g., not reimbursement or allowance)

g) recreational facilitiesh) social or athletic club membership where the benefit is principally to the

employer (Rachfalowski)i) moving expenses – thus may not need s. 62 deduction for moving

expensesThe Queen v Savage, SCC 1983 – taxable benefits need to be received in a capacity as an EME and not as a person; the payment does not need to have the character of remuneration; if it is a material acquisition which confers an economic benefit on the TP and does not constitute an exemption then it is a taxable benefitFacts: Mrs. Savage was an insurance research assistant that completed 3 voluntary courses to improve her knowledge of insurance field and EMP gave her $300; was policy that EMEs get prize – policy designed to encourage self-upgrading of staff members; EMP included $300 as other income indicating it was a prize for passing LOMA exams; EME excluded it in her tax incomeHeld: not a benefit; payments were in respect of employment to encourage self-upgrading to improve her knowledge and efficiency in the company business; however, General Provision includes but there was a specific exemption that excludes prizes under $500; statutory interpretation that specific overrules general so not a benefitLowe v The Queen, FCA 1996 – 2 part test for determining taxable benefitFacts: insurance account executive travels to New Orleans with wife for four days to wine and dine clients; CRA assessed 62% of trip for Lowe and 75% for wife was personal; as they were actually 14 hour days entertaining, the TJ says only 20% for Lowe and 75% for wifeHeld: rationale of s.6(1)(a) = it is intended to equalize the tax payable by EMEs who receive their

compensation in cash with the amount payable by those who receive compensation in cash and in kind

in the absence of the rule, the tax system would provide incentive for EMEs to barter for non cash benefits and result in a capricious and irrational tax system based on bargaining power rather than fairness

test applied:, b/c T was playing host the entire time, any personal benefit was incidental – thus entire trip was excluded

O’Brien: why would T’s wife’s trip been taxable to T if the court held the trip was for enjoyment? b/c the s. 6 catches benefits to individuals not at arm’s length with the TPThe Queen v Huffman, FCA 1990 – reimbursements are not taxable benefitsFacts: plain clothes police investigator was required to buy a large overcoat to house police equipment and under Collective Agreement would be reimbursed up to $500 for clothing purchases; deals with reimbursement of funds, which are not benefits as the worker has acted as an agent for the EMPHeld: not a benefit b/c EME was simply being restored to position he was in before i.e. EMP should have paid for the clothing anyways, as agreed to under the Collective Agreement, and the EME merely paid for it first, and then asked for the proper reimbursementO’Brien: n.b. IT-470R para. 29-30 – CRA states uniforms and other special clothing are not taxable benefits; if the EMP pays for the dry-cleaning or reimburses the EME for dry-cleaning of such clothing, this is not a benefit to the EME either

Valuation of Employment Benefits1) under Canadian law, s. 6(1)(a), the value of a material benefit received of

enjoyed = FMV of the benefita) it is up to the EME to argue the benefit was worth significantly less

(Dunlap)b) “material” does not have to mean that the benefit has to last a long

time, as TP may have “received” the benefit without having anything to keep or take home (Dunlap)

2) placing a value on a taxable benefit is difficult where the item provided to the EME has a work-related purpose and also provides a personal benefita) the % attributed to work vs. personal is a QOF, differing in each case

(Philip; Ferguson; Richmond)3) sometimes, a benefit may not be used but whether TP uses the benefit is of

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no consequence, as benefit is determined based on that it was available which was the benefit (Richmond)a) however , other cases say valuation of benefit under s. 6(1)(a) should be

determined based on actual use (Rachfalowski)4) n.b. IT-470R para. 10-12 on holiday trips, other prizes, and

incentives/awardsa) if it really is a vacation, then there is a benefitb) if person is there for partly business reason, then can apportion between

pleasure & business timeDunlap v The Queen, TCC 1998 – an interpretation bulletin is only a declaration of policy, where it is in conflict with plain meaning of ITA, ITA rulesFacts: T and his guest attended Christmas parties in 1992-1993 provided by the EMP; the EMP also offered free accommodation at the hotel, where the party was after; the Minister assessed T for the value of the meal, drinks, and enjoyment of amenities, and the hotel room, which came to around $300 per year; the EMP deducted the cost of the party for all the EMEs, but did not include any amount on T4s of EMEs as a benefit of employment; the CRA audited the EMP and then probably counted how many EMEs attended the party, and averaged the amount of liquor consumption and gratuities taxable; IT-470R was brought into argumentsHeld: court rejects any suggestion that the IT should be followed – they cannot determine the result of an

appeal or trial, especially if it is direct conflict with the economic policies expressed by Parliament in the Act

T argued he did not drink as much, and he should not have to pay as the rest for tips to the servers, and thus he is disputing the inclusion of an average amount for liquor and gratuities

T also argued that he did not have a material acquisition – i.e. he has the enjoyment of the party, but that enjoyment ends with the party

however, the wording in s. 6(1)(a) says “received or enjoyed” – and thus includes “received” without having anything to keep or take home

T could not prove that he and his guest had drunk less than the average, and thus the average amount was included in his income

Philip et al v MNR, ExCt 1970Facts: company paid for 6-day trip to Caribbean if sales exceeded quota; only scheduled event were 3 2-hour business sessions and a dinnerHeld: benefit conferred on each T was ½ of the EMP’s cost of each T’s tripFerguson v MNR, 1972 – only 10% of the value of the trip was a benefit b/c T attended convention in Greece to meet prospective customers, but did take a number of planned tours of AthensRichmond v The Queen, TCC 1998 – whether T uses the benefit is of no consequence, as benefit is determined based on that it was available which was the benefitFacts: T provided parking spot at no charge for his EMP but CRA assessed a taxable benefit of $1800; T argued that he only used the spot 20% of the time and the valuation should be reduced accordinglyHeld: no diminishment in valuation, so taxableRachfalowski v The Queen, TCC 2009 – valuation of benefit under s. 6(1)(a) should be determined based on actual useFacts: T received golf club membership but hated golf and tried to declined but was persuaded to use it for dinners with wifeHeld: the value to a particular T of such a benefit under s. 6(1)(a) should be determined on an individual basis of actual use as opposed to availabilityO’Brien: Rachfalowski was probably not appealed b/c of para. 34 of the IT – where EMP requires EME to be part of social club, the EME is not deemed to have received a taxable benefit where membership was principally for the EMP’s benefit Lowe supports this interpretation – if the membership is really for the EMP’s benefit in attracting clients, then you can argue the TP should not be taxed on that benefit, or that it was not really a benefit to TP

Allowances – s. 6(1)(b)1) allowances are always cash to the EME; taxable in income from

employment2) concern is that these things called “allowances” are really just additional

remuneration and therefore should be taxed3) allowances = amounts that EMP wants to give to EME b/c the EME, by

nature of the employment or location, will have to bear some expenses, 25

such as increased personal/living costs; it is a pre-determined amount set without any view to actual costs or expense (MacDonald)

4) but there are exemptionsa) special and remote worksitesb) certain automobile and travel allowances

The Queen v MacDonald, FCA 1994Facts: T was RCMP officer that transferred from Regina to TO and received a $700 month subsidy for rentHeld: an allowance is a limited predetermined sum of money paid to enable the recipient to provide for certain kinds of expenses, its amount is determined in advance and, once paid, it is at the complete discretion of the recipient who is not required to account for it; a payment in satisfaction of an obligation to indemnify or reimburse someone or to defray his or her actual expenses is not an allowance (it’s a reimbursement) – it is not a sum allowed to the recipient to be applied in his or her discretion to certain kinds of expensesThe Queen v Huffman, FCA 1990Facts: Huffman was reimbursed the full $500 but only had receipts for $420; the Ministry argued that the extra $80 was not a reimbursement, but an allowanceHeld: here, Huffman spent more than $500 on his jacket and overcoat in the year, and the court accepted this despite the lack of receipts, b/c at the time he bought the coat, the policy was for up to $400 – and thus he only kept receipts for $400; thus, the $80 will not be treated as an allowance

Special and Remote Worksites Exemption – s. 6.6 & IT 91-R41) s. 6(6) – where EMP provides EME with reasonable allowance for

food/transportation/housing when working at remote location or special worksite, that amount is exempt

2) 2 situations under s. 6(6) where you do not include in employment income any amount received/enjoyed by TPa) special : where you are staying somewhere special for a temporary

period, under which you can have allowances for accommodation and meals if,i) location too far away to return dailyii) it was made available to T and not rented out

(1)n.b. “special workplace” need not be a remote site – ex. TO can be a special worksite if you normally work and live in VAN

b) remote : where you stay away in a remote period, perhaps for long periods of time b/c TP cannot reasonably be expected to maintain self-contained domestic establishment b/c place is too remotei) s. 248(1) “self-contained domestic establishment” = dwelling house,

or other similar place of residence where person sleeps and eatsii) IT 91-R4 defines remoteness from an established community –

basically, an established community should be a place where you can live with a normal household, where people have access to necessities of life and where you can enjoy a life with family(1)factors to consider:

(a)the availability of transportation;(b)the distance from an established community; and(c) the time required to travel that distance

(2)essential services include:(a)a basic food store;(b)a basic clothing store with merchandise in stock (not a mail-

order outlet);(c) housing; and(d)access to certain medical assistance and certain educational

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facilities(3)main issue = how far is the workplace from the established

community?(4)remote = nearest established community with population of

1000+ is 80km away using the most direct route normally travelled

iii) IT-470R distinguishes transportation to a remote location (s. 6(6)) vs. transportation to a job where EMEs would not be expected to take their own cars (ex. if private vehicles not allowed or welcome)(1)under the 2nd category, it does not qualify as remote location, but

this is not considered as a benefit of employment(2)transportation to and from work are usually paid for by EMEs and

are not deductible anywaysAutomobile and Travelling Allowances Exemption

1) s. 6(1)(b)(v) – salesman travel expense exemptiona) here, we are thinking about the travelling salespersonb) note that sometimes benefits of employment do not have to directly

flow from EMP to EME, but for the exceptions, do need to flow directly2) s. 6(1)(b)(vii) – non-salesman travel expense exemption except MVs

a) if it is part of your job to go from place to place away from where you normally report for work

b) non-MV includes ground transportation, planes, trains, boatsc) travel expenses would include meals and accommodations while you are

away, and even incidentalsd) MV usually refers to EME’s vehicle, although sometimes EMP supplies it

3) s. 6(1)(b)(vii.1) – non-salesman travel expense exemption for MVs4) for purposes of (v) and (vii.1), any allowance that is not based on a per km

driven during employment is not reasonable i.e. measure MV use by km, or else not exempt

5) s. 6(1)(b)(xi) – cannot be both reimbursed and given allowance6) what is a reasonable price per km for an allowance? – CRA’s policy is to

look to Reg. 7306a) 52 cents/km for first 5000kms; +b) 46 cents/km for every km after that; +c) additional 4 cents/km for the territories (b/c roads are generally

rougher)7) s. 18(1)(r) – the EMP can pay up to the Reg. 7306 amount; if they pay

more, they cannot deduct unless it is included in EME’s incomeDeductions for Employment Income

1) deductions apply where EME pays out of his/her pocket, and EMP does not provide allowance or reimbursementa) s. 8(1) – sets out the deductionsb) can only deduct amounts wholly applicable to the office/employment, or

parts of the amounts (ex. if part of the expense is personal and part is for employment, can only deduct part for employment)

c) s. 8(2) – you must fit yourself into s. 8(1), or else cannot claim a deduction

2) general limitations in ss. 67 and 67.127

a) s. 67 – deductible expenses must be reasonablei) this issue usually comes up if the expenses are clearly exorbitant – ex.

choosing an especially expensive hotel for business trips that are far out of proportion to what you will get from that trip

b) s. 67.1(1) – limits how much money you can spend and deduct on beverages/food/entertainment to 50% of the expensei) this is a policy decisionii) originally, 100% was deductible for client development expenses, but

people were spending huge amounts of money and abusing the deduction, so much so that there was a personal aspect to it – people were doing it more for fun than business

iii) exceptions to s. 67.1(1)(1)s. 67.1(2)(a) – for restaurants, grocers, airlines, food processors

etc. – people who provide food/entertainment as part of their incoming earning process(a) ex. if you are running a restaurant, you can deduct the full amount of the

food/beverages you buy to prepare for the business, or deduct the amount of money you pay for movie showing rights if you are running a theatre

(2)s. 67.1(2)(f) – EME party expenses can be deducted at full provided they only hold up to 6 parties per year

3) deductions that EMEs can claima) s. 8(1)(f) – sales expense for commissioned salesperson

i) deduction for travel and other expense for selling property or negotiation Ks for EMP

ii) requirements (1)under the K of employment, which may or may not be written,

EME is required to pay own expenses(2)ordinarily required travel to carry out employment duties(3)EME has to be remunerated in whole or in part by commission in

similar amounts(4)cannot have also received an allowance that was exempt under s.

6(1)(b)(v)iii) s. 18(1)(l) restricts s. 8(1)(f)(vi)

(1)cannot deduct the cost as a business person of yachts, camps, golf courses etc. or other expensive recreational activities

(2)public policy = these are luxuries, and we should not be allowing people to ask other TPs to pay for those luxuries (b/c when 1 person deducts, others have to pay)

iv) s. 8(10) – do not get to claim the deduction unless EMP provides a form that says you were required to pay your own expenses, and you met all other conditions of the provision

b) s. 8(1)(g) – transport EME’s expensesi) meals and lodging (the “and” is important) deductible if worker works

on passenger or goods transport vehicle, and meals and lodging sometimes on the vehicle

ii) s. 8(1)(g) requires incurring both meals and lodging expenses for the worker to claim the deduction under this provision (Crawford)

iii) the deduction for meals under s. 8(1)(g) is not intended to be available to workers who return to their homes each night as a

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matter of course (Crawford)c) s. 8(1)(h) – non-sale person travel expenses; allowed to deduct when

i) travelling is ordinary part of jobii) TP is required to pay own expenses for traveliii) then, can deduct unless received allowance that is not taxable under

ss. 6(1)(b)(v), (vi) or (vii) or deductions claimed under ss. 8(1)(e)-(g)(1) ex. sales expenses would come under (f), but if did not receive income on commission,

might be able to deduct under (h)(2) i.e. if did receive commission, try (f), if no commission, try (h)

d) s. 8(1)(h.1) – MV travel expensesi) can only deduct if travelling during the course of employment/office

(Martyn)ii) the travelling has to be part of TP’s workday to be deductible (Hogg)

e) s. 8(4) – meals rule: you do not get to buy lunch just b/c you are on duty; TP who is an officer/EME can only deduct meal under ss. 8(1)(f) or 8(1)(h) unless the meal was consumed during a period while the TP was required by the TP’s duties to be away, for a period of not less than 12 hours [n.b. 50% rule in s. 67.1(1) applies]i) n.b. this provision helps explain the result in Renko – the ferry EMEs were going home every

night and so the meals should not be deductible unless they were really going to be away from home for more than 12 hours

f) s. 8(1)(b) – legal expenses: if you were suing for anything from your EMP that you think you had right to, entitled to deduct legal expense

g) s. 60(o.1)(i)(B) – the parallel deduction for including retiring allowancei) if have to sue for wrongful dismissal and recover, either damages or

settlement amount, must include the wrongful dismissal under s. 56(1)(a)(ii), but then can claim the deduction under s. 60(0.1)(i)(B)

ii) this is becomes retiring allowance is another source – it is not employment income, and thus have to find a separate deduction provision to match it

iii) here, your deduction may exceed your remuneration – b/c the amount you recover may be more less your legal fees

h) professional and union dues – ss. 8(1)(i)(i), (iv), (v) and 8(5)i) b/c the dues must be annual in nature, the payment of an additional

fee on entry into a profession is not deductible employment expenseii) despite the restrictive language of s. 8(1)(i)(i), Ts often claim annual

dues paid to organizations that do not involve a professional status of any sort – such claims are often “successful,” b/c the deductions were not audited

i) cost of supplies: s. 8(1)(i)(iii)j) home office expenses: s. 8(13)

i) under (a) cannot deduct, unless…(1)you are a home-based EME and perform more than 50% of work at

home; or(2)the space is used exclusively for the purpose of earning income

from the office/employment and used on regular basis for meeting customers, and other people in the ordinary course of performing duties

ii) under (b) where above 2 conditions are met, cannot generate a loss from employment from this – if your income from home is more than

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income for employment, you can deduct down to nil, but not negativeiii) under (c) can carry forward deductions that could not be included

under (b) if employment/office carries onto following yeark) moving expenses for EMEs and students (s. 62) [see pp. 41-43]

Crawford v The Queen, TCC 2002 – the deduction for meals under s. 8(1)(g) is not intended to be available to workers who return to their homes each night as a matter of course; the “and” in s. 8(1)(g) is conjunctive and so workers must incur both meals and lodging expenses to be able to deduct under s. 8(1)(g)Facts: 4 ferry workers of BC Ferries attempt to make deductions for food under s. 8(1)(g); was a test case for all other ferry workers; CRA had advised in letter that meals were deductibleHeld: statutorily interprets s.8(1)(g)(ii) the “and” as requiring both meals and lodging not only mealsMartyn v MNRI, TAB 1962 – commuting is not a deductible travel expense unless it is in the performance of the duties of the office or employmentFacts: pilot T attempted to deduct the cost of commuting between his home and the airportHeld: driving to and from work is not deductible unless the driving was work dutiesHogg v The Queen, FCA 2007Facts: Judge had base court in Etobicoke and would receive a travel deduction when travelling to other courthouses 15 km+ away, argued that security concerns converted the commute to base court as deductible; T claimed to fear assaults while commuting so he needs the carHeld: commuting for a judge is not deductibleThe Queen v Swingle, FCTD 1977 – courts do not recognize chemists as a professional under statuteFacts: T was a chemist was a gov. worker in a number of different professional societies to keep abreast of rapidly changing developmentsHeld: status recognized by statute is a professional status that is dependent upon membership in the professional society

Income from Business/Property1) s. 3(a) – business is a source of income for tax2) s. 9(1) – a TP’s income for a tax year from business/property is TP’s profit

from that business/property for the yeara) profit = revenue – expensesb) def. of profit is a QOL, thus no reference to accounting principles is

relevant3) s. 9(2) – loss = revenue-minuses when expenses > revenue4) s. 20(1)(c)(i) (the latter in connection with Stewart) – deductions permitted

in computing income from business or property include interest on borrowed money used for the business/property in earning incomea) deduction must be from expense incurred for the business, not from

personal activities5) s. 248(1) “business” = a profession, calling, trade, manufacture, or

undertaking of any kind whatever, but not including office or employment6) s. 248(1) “property” = property of any kind whatever, and includes

a) a right of any kind whateverb) unless a contrary intention is evident, money,c) a timer resource property, andd) the work in progress of a business that is a profession

7) s. 9(3) – income or loss from a business/property does not include any CL/CG

Canadian Controlled Private Corporations1) distinction between income from property and income from business is

significant when the income is earned by a CCPC2) CCPC means

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a) Canadian residentb) may not be controlled by persons who are non-residents or public

corporationsi) public corporations = class of shares listed on stock exchange

3) to be eligible for the special low tax rate, or “small business deduction” (it is actually a credit, that results in a rate of 11% federally, plus 2.5% in BC, for a total of 13.5%), the CCPC’s income must be income from an “active business carried on by a corporation” (s. 125(7))a) this excludes income from a “specified investment business” (SIB) or a

PSB [see p. 20 for PSB test]i) s. 125(7) SIB = a business with purpose to derive income from

property but not including business where(1)the corp. employs in the business more than 5 full time EMEs

throughout the year(2)any other corp. associated with the corp. provides managerial,

admin, financial, maintenance or other similar services to the corp. in the year and the corp. could reasonably be expected to require more than 5 fulltime EMEs if those services had not been provided

ii) i.e. ITA only allows income of CCPC from a SIB/PSB to benefit from the 13.5% rate if it employs in the SIB/PSB more than 5 full time EMEs throughout the year

iii) otherwise, CCPC engaging in PSB and SIB taxed at 38%iv) policy = individuals should not have access to the special low tax

rate by using a corporation to perform their employment, or to invest their capital to earn income from property

b) the small business rate is to encourage entrepreneurialism for start-ups, but soon as corporation has more than $500k in profits in a year, the corporation will start to pay the 26% general rate (15% federally and 11% in BC)

c) recall that a non-resident is subject to Canadian taxation if it carries on business in Canada (through a branch operation) or disposes of taxable Canadian property (s. 2(3)), and is subject to Part XIII tax on amounts paid or credited to it by a Canadian resident – but such a corp. can never be a CCPC

4) pay attention to cash vs. accrual method of calculating incomea) recall EMEs always cash method – income/allowance/benefits received

deducted by amounts paid during the yearb) if income from business, always accrual method [accrual = amounts

received + receivable]5) n.b. corps. must withhold EME portion and pay the EMP portion of CPP – s.

153(1)(a)Organized Activity and Gambling

1) business = “anything that occupies the time, attention and labour of a man (or corporation) such that it requires an organized, ongoing, commercial activity with the objective of earning a profit” (Smith v Anderson, 1880 UKCA)

2) in general, common law says business = organized activity that is carried 31

on for the purpose of profit (Graham v Green, KB 1925)a) ex. bookkeeper running horseracing betting is carrying on a business, but the people

continuously betting on the horses are not carrying on a business (facts from Graham)3) gambling cases fall into 3 categories

a) cases involving the gamblers for whom gambling is a pleasurable pursuit not taxable even though they do it regularly, even compulsively and with some sort of organization or system (LeBlanc; Epel v The Queen, TCC 2003)

b) where the gambling was an adjunct or incident of a business carried on taxable (ex. casino owner who gambles in his own casino or an owner of horses who trains and races horses and who bets on the races)

c) where a person uses his own expertise and skill to earn a livelihood in a gambling game in which skill is a significant component taxable (ex. the pool player who, in cold sobriety, challenges inebriated pool players to a game of pool (Luprypa))i) test for whether gambler is a professional or not = whether it was to

conduct an enterprise of a commercial character or whether it was primarily to entertain himself(1)where a TP gambler has a system and a REOP, it is likely they are

in the gambling business and thus their winnings are taxable (Luprypa)

(2)one cannot be considered a professional gambler where betting on lotteries in a risk maximizing way (LeBlanc)

Luprypa v The Queen, TCC 1997Facts: T is in business of hot dog stands, but at the time, he was a pool shark; T filed 0 income for 2 years, and prepared but did not file for the next year – this was intended to support a mortgage application (i.e. he tried to pretend he had an income); 1991 a CRA EME prepared his tax return for him using net worth assessment; T argued most of it was not taxable b/c most of it came from pool sharkingHeld: gambling can be a source of income if it amounts to a business; in a business, the owner tries to minimize risk and maximize profit, and has a system to do that – as long as the gambler has such a system, he is conducting a business; T basically bet somebody that he could beat them at pool, and he beat them; T systematically chose opponents, and was playing Monday to Friday; T never drank when played and relied on the game as a steady source of incomeLeBlanc v The Queen TCC 2006Facts: brothers LeBlanc and LeBlanc were buying massive dollars worth of tickets per week in sports lottery; won $5 million in 4 years; they were buying so many tickets that they had to carry them around in garbage bags; had 15 helpers (friends) to help them buy tickets (b/c there is a limit as to how many tickets each person can buy)Held: LeBlanc argued that under s. 40(2)(f) [in the CG section of the Act] gain or loss from lottery tickets is

deemed to be nil however, this is a CGs idea – what matters is whether LeBlanc had a business, since business can be

a source of income (i.e. see it as business, and not CGs) s. 52(4) [this is a companion to s. 40(2)(f)] – when you win something other than cash on a lottery,

your cost is its value at the time of winning ex. won house worth $1M, sold house for $1.2M, your increase is $200k

expert testified that they maximized the risk and LeBlanc brothers were just very lucky – so even though there was some organization to it, there was no skill/plan involved – it was just pure luck cannot call it a business

O’Brien: problem for gov. is if judge had held that the winnings were taxable, everyone who tries this out of luck and loses will be able to deduct

Pursuit of Profit1) pursuit of profit/intention to make profit necessary to constitute a business2) old test = Moldowan v MRN – the REOP test (reasonable expectation of

profit) = T’s expectation of profit from his/her activities must be reasonable3) new test = Stewart v The Queen, SCC 2002 – determination of source of

income from business/property test32

a) is the activity of the TP undertaken in pursuit of profit, or is it a personal endeavour?i) where activity is completely commercial go to step 2 (no need to

continue step 1 analysis)ii) where the TP’s venture at least suggests hobby or personal pursuit,

determine if it is undertaken in a sufficiently commercial manner, to be considered a source of income by considering:(1)does the TP have an intention (subjective) to profit?(2)is there evidence (objective) to support that intention? (consider

objective Moldowan factors, listed below)iii) if you can get arms length financing it means the banks think it is a

reasonable business investment where you will be able to pay the interest, this is indication of commercial viability

b) if it is not a personal endeavour, is the source of income a business or property?i) non-exhaustive objective factors for determining if activity is in

pursuit of profit (the Moldowan factors):(1)the profit and loss experience in the past years;(2)the TP’s training;(3)the TP’s intended course of action; and(4)the capability of the venture to show a profit (REOP test)

4) goal of courts = stop CRA from saying that if you do not earn profit, you did not have REOP, and so you cannot deduct

5) secondary question of whether expenses are deductible come under s. 67Stewart v The Queen, SCC 2002Facts: condos for rent did not make profit, but was unprofitable for a long timeHeld: REOP is a sufficient requirement for there to be a source, but it is not necessary under old test = if TP failed at investment/business after a couple of years, TP would not get

deduction you can still have a source of income even if the facts demonstrate the business was never going to

successful i.e. REOP should not be a stand-alone test the old test was too often used to second guess bona fide business choices the REOP was vague, unfair and arbitrary in the way it was applied to TPs thus, old test is overruled test applied

no personal element and no personal enjoyment the whole package of what he invested in was all done at arm’s length – everybody involved (ex.

financiers, developers etc.) had put together a package that was meant to have value and was meant to lead to profits – the fact that it did not was nobody’s fault (it was a change in the market) it was a reasonable risk that the financial institution thought it was taking by lending money

to Stewart – thus it must have been a reasonable decision for him to invest in and rent-out the condos

T should be able to deduct under s. 21(c)Adventure of Concern in Nature of Trade – Business vs. Capital Gain

1) ACNT is used to distinguishes whether something is business income or CG2) ACNT = what could be a source of income is disposed of, but is not

held/acquired/disposed of as a capital asseta) so not treated as a CG, but an income or loss from business

3) why is this distinction important ? if a TP makes a gain, they want it characterized as a CG – taxed at ½ of business income; if they make loss, they want it characterized as business, as business losses are fully

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deductible against all sources of income (where as CL only deductible against CG)

4) general principle = when a person habitually does a thing that is capable of producing profit, they are carrying on a trade or business even if it is not their ordinary occupation (see also s.1 IT-459) (Taylor)a) determination between business income vs. CG turns on whether the

single transaction can be characterized as an ACNTb) where the subject matter is a commodity such that it excludes the

possibility of investment income, it will be an ACNTc) shares are usually, except in extreme situations or if you are

trader/dealer in securities, a capital asset (Irrigation Industries)5) capital investment vs. business/ACNT

a) whether the gain accrued to an owner of securities depends whether the gain is a mere realization or a change of investment (in which case it falls into the capital category) or whether the gain is attributable in what is truly the carrying on, or carrying out, of a business (where it would be classified as income); it is a QOF to determine whether one’s activities amount to carrying on a trade or business (Arcorp)

b) factors for determining capital investment or business (ACNT) are: i) manner: TP’s conduct compared to ordinary dealer of same property

(1)if comparable to ordinary dealer, it can be an ACNT (Taylor)(2)considerations: duration of the holdings (whether, for instance, it

is for a quick profit or a long-term investment), frequency of the transactions, time spent on the activity (Arcorp), steps taken to increase marketability such listing of sale, and TP’s commercial background (ss. 7-8 IT-459)

ii) nature: whether the nature and quantity of the subject-matter of the transaction may exclude the possibility that its sale was the realization of an investment or otherwise capital in nature, or that it could have been disposed of otherwise than as a trade transaction(1)where the subject matter is a commodity such that it excludes the

possibility of investment income, it will be an ACNT (Taylor)(2)presumption that the purchase of shares is a capital transaction

rather than ACNT unless in the business of securities (Irrigation Industries), but it is rebuttable if manner of a securities trading business (Arcorp)

(3)where property cannot produce passive income or personal enjoyment it is indication of business transaction (s. 9 IT-459 )

(4)if property can produce income only if TP operates or leases it and can only make use by selling, then it is a business transaction (s. 10 IT-459)

iii) intention: was there intention to sell at a profit?(1)not determinative, but influential towards ACNT (Taylor)(2)if any intention of profit, even secondary, then transaction will

likely be ACNT (perhaps just for land) (Regal Heights)(3)secondary intention requires not only the thought of a sale at a

profit at moment of purpose (Saskatchewan Wheat Pool) but that the prospects of such a sale be an operating motivation in the

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acquisition of the capital property (Snell Farms v The Queen, FCTD 1990) [i.e. “if this investment goes bad we can always sell the property” ACNT ]

iv) factors that do not preclude ACNT(1)single or isolate transaction (Routlege)(2)outside normal income earning activities(3)no organisation to carry out transaction

6) special rules for real propertya) land transactions are difficult as land can be capital asset/investment,

used to carry on a business (operations), object of speculation, traded as part of ongoing business (housing)

b) factors you consider if land is ACNTi) intention (and secondary intention) of the TP at time of purchase

(Regal Heights)ii) feasibility of TP’s intention (IT-218R)iii) geographical location, zoning (IT-218R)iv) extent to which the TP and his/her associates carry out the initial or

primary intention (IT-218R)v) evidence of change of intention (IT-218R)vi) nature of the business, profession, trade, experience of the TP and

his/her associates (IT-218R)vii) extent to which the purchase is made with borrowed money (IT-

218R)viii) length of time the property is held by the TP (IT-218R)

(1)if TP buys with intention of selling nearly immediately at a profit ACNT (Taylor)

ix) whether TP made the purchase alone or with others (IT-218R)x) reasons for selling (IT-218R) – cases where TP has been successful in

characterizing something as capital investment is when they buy it, start work on it, and the unsolicited offer that is unbelievably good arises out of the blue – here, court says it is capital transaction, even though there was no income from it

xi) extent of TP’s (and associations) previous and subsequent dealing in real estate (IT-218R)

IT-459 – ACNT1) general principle = when a person habitually does a thing that is capable of

producing profit, they are carrying on a trade or business even if it is not their ordinary occupationa) TP can carry on more than one business

2) where it is infrequent or a single transaction it is still possible that it is a business transaction if it can be shown to be an ACNT; factors to consider include:a) TP’s conduct compared to ordinary dealer of same property

i) consider if steps taken to increase marketability, such listing of sale, as this indicates business transaction

ii) consider TP’s commercial backgroundb) nature of the property – where property cannot produce passive income

or personal enjoyment, it is indication of business transaction; if 35

property can produce income only if TP operates or leases it and can only make use by selling, then it is a business transactioni) some property such as securities are prima facie investment in

naturec) whether TP’s intention is consistent with trading motivation

i) intention to sell at a profit is not enough to be considered a business transaction but can influence the decision

ii) TP may have more than one intentioniii) secondary intention to sell if significant if circumstances suggest little

likelihood of retention b/c lack of financial resourcesd) isolated transactions – the following facts, in and of themselves, are not

sufficient to prevent a finding that a transaction was an ACNTi) that transaction was single or isolated (Taylor)ii) TP did not create any organization to carry out transactioniii) the transaction is totally different from any of the other activities of

the TP and he has never entered into such a transaction before or after (Taylor)

e) losses – a TP who embarks on what is established as an ACNT may suffer a loss rather than the anticipated gain; such a loss constitutes a loss from business and enters into the calculation of the TP’s non-capital loss for the year

MNR v James A Taylor, Exch Ct 1956 – general principle = when a person habitually does a thing that is capable of producing profit, they are carrying on a trade or business even if it is not their ordinary occupation (see also s.1 IT-459); determination between business income vs. CG turns on whether the single transaction can be characterized as an ACNT; where the subject matter is a commodity such that it excludes the possibility of investment income, it will be an ACNTFacts: T is running the Canadian subsidiary of US company; he thinks the Canadian should be able to acquire greater amounts of material used in its production; US company says no – keep acquisition of raw materials to a minimum; so T decides to buy some lead to resell to the company, b/c he could get a good price; T buys 22 carloads of lead in his personal capacity, with the intention of making sure his company has access to it later; T was right, value of lead increases and he sold it to his company at a profit; the profit he made is assessed as income from business; T argues he is not in business of buying lead, and he did it for his company – thus it is a capital transaction (n.b. before 1972 capital transactions not taxable at all)Held: ACNT it may be true that what T does for living is run the company, and not buy/sell lead, but T does not

have to be carrying on a business for a transaction to constitute a business transaction carrying on a trade/business is one thing – but you can also have an ACNT, and income from ACNT

will be treated as income from business when you buy with intention of reselling as soon as possible to make a profit ACNT test = was the TP’s transaction conducted in a way that a trader would?; if undertaken similarly to

the trader (who is in business of selling/buying such goods), then ACNT applied: ACNT, so T taxed on it; T was not going to do anything with the lead other than sell it to the

company; when the lead sits there, it does not generate income – must sell it to make income; T carried out the transaction in same way a trader of lead would normally do; even though it is an isolated transaction, does not make it not a business transaction

Regal Heights Limited v MNR, SCC 1960 – if any intention of profit, even secondary, then transaction will be ACNT (perhaps just for land)Facts: businessmen planned to develop a site for a shopping mall near proposed Trans-Canada Highway, but then a national company announced plans to build a shopping mall 2 miles away so T scraps plans and sells property for a profit of $140kHeld: secondary intention of speculation made ACNT; court accepted that they had a primary intention to buy the land as a capital investment (a capital asset to generate income); however, they also had a secondary intention from the outset to sell the land for profit if unable to build shopping mall; no evidence of any intention on the part of the promoters to build regardless of outcome of major retailer tenant negotiations

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O’Brien: overall, land is difficult to categorize b/c it depends somewhat on credibility of the TP when he testifies his intentions in courtIrrigation Industries Limited v MNR, SCC 1962 – shares are investments by very nature and lack of immediate prospect of dividend is not criticalFacts: corporation was incorporated, but did not do anything; it bought mining shares of another company (new company); of the shares, it held them for 3 weeks – sold for profit of 60%Held: this was a capital investment – nature and quality of the shares does not exclude it from being a capital investment (unless you show them to be something else – strong presumption), they are an income generating asset by their very nature CRA argued T had to borrow to buy the shares – means they had to make profit quickly to pay back

the loan court: that you have to borrow to buy does not alone make it ACNT; it does not matter that there

was no prospect of receiving any dividends, b/c new companies have no profits yet, so they have no possibility of paying dividends

CRA argued if the shares were acquired with intention of selling at profit, that makes it an ACNT court: even capital acquisitions are made with hope or intention that eventually they will be sold

at a profit apply Taylor test: nature and quantity of subject matter – shares are an investment in the corp.

itself, which is different in nature to things like commodities; the shares were not dealt with in a way a dealer in securities would deal (prof. thinks this is false – court is only thinking of dealer’s underwriting function)

Arcorp Investments, FCTD 2000 – capital investment vs. ACNT testFacts: sole shareholder was Robert L. Hodgkinson who was employed as a commission securities salesman by Canarim Investment Corp., a licensed securities brokerage firm in BCHeld: the net profits so derived by Arcorp are to be classified as income earned by Arcorp in carrying out the business of a trader or dealer in securities b/c its operations are the same kind and were carried out in the same way as those which are characteristic of ordinary trading in that line of business; this case is distinguish from Irrigation Industries b/c trading in stock traded as business income b/c carried on as business rather than capital investmentsSaskatchewan Wheat Pool v MNR, TCC 2008 – for a secondary intention to have ACNT with primary motivation as capital asset, the purchaser must have in his mind, at the moment of the purchase, the possibility of reselling as an operating motivation for the acquisition; that is to say that he must have had in mind that upon a certain type of circumstances arising he had hopes of being able to resell it at a profit instead of using the thing purchased for purposes of capitalFacts: the transaction carried out by S resulted in loss, so S wants it to be treated as an ACNT (b/c then loss fully deductible from income from other sources)Held: not enough to know that you could sell at profit if things do not work out; must be motivated at potential of re-selling of profit

Income from Property1) almost anything that can be given a value can be property for tax purposes

a) s. 248(1) “property” = property of any kind whatever2) s. 9(3) – distinguishes income from property vs. income from disposition of

property income from property does not include a CG from the disposition from that property

3) note that the same analysis (Stewart [see p. 31]) for source of income and REOP applies to property income as well as business income, b/c all income needs a source

4) CGs are treated more favourably than income from businessa) only ½ of CGs is included in incomeb) TPs want to characterize a transaction as capital transaction if it is

profitablec) TPs want to characterize as ACNT if it incurs losses, so the loss is fully

deductible in computing income5) based on common law, the distinction generally depends on the extent of

activity of the owner in earning the incomea) criteria include (Lois Hollinger v MNR, FCTD 1972)

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i) whether the income was the result of efforts made or time and labour devoted by the TP

ii) whether there was a trading character to the incomeiii) can the income be fairly described as income from a business within

the meaning of the term as used in the Act, andiv) the nature and extent of services rendered or activities performed

b) thereforei) if income is derived principally from the ownership of property

income from propertyii) if earning of the income involves significant amount of activity

income from a business6) case law

a) contingent right to receive income from a trust is property income (Fasken Estate v MNR) but benefit obtained by convenantee under a non-compete covenant was not considered property as incapable of ownership (O’Brien: decided wrongly as right can be valued when business was sold) (No. 481 v MNR)

b) rental income where some services provided to tenants has been found to property income (based on extent of activity) (Walsh and Micay v MNR)

c) rental income earned by corporation pursuant to objects of incorporation are generally presumed to be business income (Etoile Immobiliere SA v MNR)

7) n.b. s. 212(1)(d) – cross-border computer software tax will not be examined, but this is the provision to look for computer software tax

Interest Income1) the asset on which interest is earned is essentially a debt obligation2) the lender has the asset, the debt obligation, which includes right to be

paid interest and the principle amounta) legal meaning of interest = compensation for the use of money

belonging to another person; it must be referable to a principle amount and must either accrue daily or be allocable on a day-to-day basis (Miller v The Queen, FCTD 1985)

b) n.b. late payment charges have been considered to be interest as extending credit (Wenger’s Ltd v MNR, TCC 1992)

3) debt obligation is not well defined in the ITA, but is a form of property to the person who is owed the money and can take many forms (ex. a bank account is a debt where bank owes the depositor – it is a demand loan b/c you can demand the bank any time; bond issues on corporations is you making loan to a corporation, and the bond holder has a debt obligation)

4) s. 12(1)(c) – you have to include interest when calculating incomea) you calculate interest based on received or receivable depending on

whether you are using cash or accrual basisb) imports Surrogatum rule b/c it says anything that is replacement

interest is taxable5) timing

a) although “any amount received or receivable” 12(1)(c) indicates timing of including interest amount is base on normal timing, s. 12(3)-(4) provides special timing rules and doesn’t let you defer income, which

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overrides 12(1)(c)b) s. 12(3) – applies to corporations = corps. must include in income for the

year interest that accrues by the end of its taxable year, or amounts received/receivable by the end of its taxable year that have not been included in income in a preceding year calculate immediately

c) s. 12(4) – applies to interest payable to an individual pursuant to an investment K = must include in income each year the interest accrued on the investment K to each “anniversary day” calculate with year grace

d) investment Ks (s. 12.(11)) = any debt obligation, except a debt obligation on which the taxpayer reports interest as it accrued daily

e) anniversary day (s. 12(11)) = if the invest K was made on June 1st, the anniversary day will be May 31st of following year

f) goal of the timing rules = not allowing you to defer income to an abusive extent

6) blended payments = where a TP receives a single payment both for repayment of capital and interest this is considered a blended paymenta) s. 16(1) – does not matter what K says, Act will deem the part that can

be considered to be interest to be interest, and therefore fall under s. 12(1)(c) with the timing rules of s. 12(3)-(4), such that the interest would be included in income from property and be taxable

b) repayment of principle is not taxablec) where a single payment is above FMV, the amount greater than FMV will

be considered as the capitalization of interest and will be included in the TP’s income from property (Groulx)

d) where payment not above FMV, there may be no interest (Vanwest Logging Co)

7) s. 20(1)(c) – borrower may be entitled to deduct interestGroulx v MNR, SCC 1967 – agreement to forgo interest for higher price was a capitalization of interestFacts: T was farmer, trying to avoid tax on outstanding amount still to be paid for his farm; T tried to capitalize interest (instead of receiving it as income, he was treating it as purchase price of his farm); T sold his farm for $395k, and accepted $85k immediately, with rest to be paid in 7 installments; only if an installment was late did interest arise; MNR said the installments he received were really blended payments – partly the purchase price for his farm and partly interest on the part of the purchase price that hadn’t been paid yetHeld: $395k was above FMV, so there must have been interest built in – on evidence, purchase price would have been lower if T had been paid in full at once; furthermore, if installment was late, had to pay 6% interest – more proof that interest was built into the purchase price

Rents and Royalties – s. 12(1)(g)1) rent = fixed payment for physical use of real or personal property for a

given time period (The Queen v Saint John Shipbuilding & Dry Dock, FCA 1980)

2) royalty = a share in the profits or a share or % of profits based on the use of the number of units, copies, or articles sold or rented of intangible property; based on the degree of use or duration of usage (Vauban Productions v The Queen, FCTD 1975)a) ”use” is very broadly interpreted – can mean control of property,

exploitation of IP, franchise fees etc.3) when an amount is paid, is it to purchase a portion of a property or is it a

royalty? s. 12(1)(g) – expands what might otherwise be a royalty39

a) if all the legal rights in property are transferred saleb) if less than all rights transferred lease with rent or royalties

4) s. 12(1)(g) – if you sell interest in property, it is taxable (i.e. royalty)a) n.b. Spooner – the case that got s. 12(1)(g) included in the Act

5) if within Canada, recipient must pay tax when receivedSpooner v MNR, UKPC 1928-34Facts: T owned ranch in AB, sold 20 acres to Vulcan Oil for $5k, 25k shares and royalty of 10% of all oil products from landHeld: court considered oil and gas rights (had subsurface rights at the time) as a capital payment and therefore not taxable; T had simply sold her property and realized CGsn.b. result of this case was the inclusion of s. 12(1)(g) – purpose of which is to prevent TPs from converting what would otherwise be fully taxable rent or royalty income into CGsWain-Town Gas & Oil Company, 1952Facts: company had monopoly K with municipality for exclusive right to sell gas to municipality and company sold off for amount based on 10% of gross receiptsHeld: transferring a property right in exchange for 10% gross receipts is based on use or production – considered a royalty

Dividends1) dividends = return (yield) on equity investment in a corporation2) any pro rata distribution from a corporation to shareholders is a dividend

unless it is make in liquidation of company or on an authorized reduction of corporation capital (Hill v Permanent Trustee of New South Wales, UKPC 1930)

3) s. 84 deems a dividend to be paid where a corporation :a) increases the paid-up capital in respect of the shares of any class of its

capital stock;b) distributes funds or property on the winding-up, discontinuance or

reorganization of its business;c) redeems, or purchases for cancellation, its shares; ord) reduces the paid-up capital in respect of shares of its capital stock

otherwise than by way of a redemption, acquisition, or cancelation of the shares

4) dividends from both resident / non-resident corporation are included in income from property – s .12(1)(j) + (k)a) s. 12(1)(j) – when Canadian company pays a dividend to a Canadian

recipientb) s. 12(1)(k) – when a foreign company pays dividend to a Canadian

recipient5) but the Act contains a number of special rules designed to provide relief

from double taxation of income earned through a corp.a) double taxation = the corp. earning the income pays corp. income tax

and the shareholding receiving the dividends paid out of the corp. earnings pays income tax on the dividends received

b) the Act allows individual shareholders a dividend tax credit in computing tax payable and allowing corp. shareholders to receive dividends on a tax-free basis

6) there are special treatment rules for dividend [don’t need to know them for this course]

7) recall s. 212(2) requires the withholding tax of 25% when Canadian corp. pays dividend to non-residenta) a non-resident of Canada is not subject to tax on all their income – only

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taxed on income from Canadian sourcesb) the non-resident is not carrying on business in Canada, nor employed in

CanadaDeductions for Income from Business or Property

1) s. 9(1) – a deduction is based whether it is deducted under ordinary principles of commercial trading or accepted business to earn income [see IEP test, p.40]

2) then you look at applicable provisions of ITA to see if any restriction on deduction (ss. 18) [n.b. s. 62 and 67 are also deductions, but s. 18 is the main one]a) s. 18(1)(a) – must show deduction is related to producing income from

business or property (general limitation)b) s. 18(1)(b) – outlay to acquire a capital asset – it is non-deductible; its

under CGc) s. 18(1)(h) – personal and living expenses cannot be deducted except

travel expenses when travelling away from home in the course of business [see p. 41]i) s. 67.1(1) limits food/beverages/entertainment deduction to 50%ii) n.b. this is for the EMP, not the EME

d) s. 18(1)(l) – cannot deduct recreational facilities maintenance unless the business is recreational facilities or as the club (yacht, camp, lodge, golf course, etc.); cannot deduct EME club membership dues if main purpose is dining / recreation / sport

e) s. 18(1)(p) – deductions for PSB are very limited to salary, selling costs, etc. (goal = so you cannot get more deductions by becoming an incorporated EME rather than just as a standard EME) (ex. if a incorporated person purchases a duplex, can he deduct the interest?; yes, as the purchase of the duplex would be as a SIB in addition to the PSB; no restrictions on deductions from SIB)

f) s. 18(1)(r) – limits on EMP deduction of allowance to EME of a MV; reasonable amount limit; anything in excess of Reg. 7306 is not deductible, unless included in the EME’s income from employment

g) s. 18(1)(t) – cannot deduct your tax (penalties or interest of unpaid tax) in computing your taxi) s. 60(o) – tax liabilities not deductible, but legal expenses incurred

while appealing/litigating over a tax assessment is deductible3) s. 20 – specific deductions permitted

a) Capital Cost of Property CCA (capital cost allowance) – s. 20(1)(a)b) Cumulative Eligible Capital Amount, Interest – s. 20(1)(c)c) CCA Terminal Loss – s. 20(16)

4) s. 67(1) – general “reasonableness” limitation (i.e. the reasonableness test) – in computing income, no deduction shall be made in respect of an outlay or expense in respect of which any amount is otherwise deductible under this Act, except to the extent that the outlay or expense was reasonable in the circumstances

5) profit = net profit after expenses; an expenditure properly deducted under accounting principles will be deductible for tax purposes, unless prohibited by some provision of the Act (Canderel)

Canderel v Canada, SCC 1998 – an expenditure properly deducted under accounting principles will be deductible for tax purposes, unless prohibited by some provision of the

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Act, and an amount not deductible pursuant to accounting principles will not be deductible for tax purposes, unless the Act provides a specific deduction

Income Earning Purpose Test1) overall, permissibility of a business deduction is based on 4 steps (IEP test):

a) is it deductible under s. 9(1) considering its deductibility by the ordinary principles of commercial trading or accepted business Daley?i) accounting practices reference omitted from IEP test (The Royal Trust

Co)ii) the expenditure does not need to match a specific revenue, but must

be considered in the light of its connection with the operation, transaction, or service in respect of which it was made, so that it may be decided whether it was made not only in the course of earning the income but as part of the process of doing so (Imperial Oil)

iii) where income is earned from certain operations all the expenses, wholly, exclusively, and necessarily incidental to such operations must be deducted – costs include not only ordinary operations costs, but also all monies paid in discharge of its liabilities normally incurred in the operations

b) was expenditure made or incurred for the purpose of gaining or producing income from the business or property (s. 18(1)(a))?

c) if so, is deduction prohibited by s. 18 or if so, specifically allowed in s. 20?

d) is the deduction reasonable? (s. 67)2) IT-470R

a) para 33 – if EMP has recreational facilities and lets EMEs use it for free or for little payment not taxable for the EME

b) para 34 – where EMP requires EME to be part of social/athletic club, while not deductible for EMP under s. 18(1)(l), EME may not be taxed on it (EMP will wish to pay b/c they feel such membership is still beneficial for the business)

Daley v MNR, TCC 1950 – established IEP test: whether a business deduction is permissible should consider ordinary principles of commercial trading or accepted businessFacts: T was called to bar in NS, but was war time and so joined the Navy; Ontario wanted T to pay $1500 for T to be called to bar in Ontario; T paid it and starting practicing; in computing his income tax, he spread the $1500 over 3 years to deductHeld: not allowed to deduct his Bar fee; while it is true that T has to be called to Bar in Ontario to practice, but the fee is not incurred in the course of earning income on an ongoing basis of the business; instead, the fee is a one-time thingO’Brien: T’s annual fees will be deductible, b/c that is on-going and is incurred as part of practice of lawImperial Oil Limited v MNR, EXCH 1947 – need not match revenue to expenditure to meet IEPFacts: Imperial Oil pays other company for ship accident; Imperial Oil deducted that settlement amount; Imperial Oil’s business was partly transportation of petroleum products by seaHeld: the accident that occurred was part of the ordinary business – whenever you go out to sea, there is a chance you will hit a boat; part of Imperial Oil’s business is transporting stuff by sea – and if in doing such business they incur liabilities due to an accident, that money is deductible; that the amount was extraordinary in amount should be irrelevant; liability for boat accidents was reasonably foreseeable; you do not have to match a deduction to an expenditure – look at it holisticallyThe Royal Trust Co v MNR, EXCH 1957 – clarified 2-steps of IEP testFacts: RTC increases its business by country club memberships by its executives; encourages executives to network at the club and encourage clients to invest in RTC; claimed deduction for those membershipsHeld: Minister argues it may have been incurred for earning income, RTC must prove that paying for these

club fees actually gained RTC income on the facts, there were several clients who moved their money to RTC b/c of contacts made at the

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club judge says, contrary to what he said in Daley and Imperial Oil, he is not bound by accounting

practices – commercial practice is what guides the courts s. 18(1)(a) is not even inferential authority for deductions – s. 9(1) is where you look to deduct, and

then you look to s. 18(1)(a) to see if that deduction is permitted but s. 18(1)(a) is not a huge restriction either

here, RTC effectively expanded their office to the club – the club served as a venue to solicit clientsn.b. this case is overruled in part by s. 18(1)(l) – club membership not deductible for the EMP

Deduction of Personal or Living Expenses1) s. 18(1)(h) – personal or living expenses are not deductible, except travel

expenses when travelling away from home in the course of businessa) s. 67.1 – for applicable travel expenses, food, beverages, and

entertainment expense is deducted at lesser of 50% of actual/reasonable cost

2) domestic work primary domestic duties are not fully deductible even where income producing work is secondary in nature, but a portion of the portion of business expense can be deducted (Benton)

3) commuting usually a personal or living expense that are restricted from deductions (Ross Henry)

4) moving expenses – s. 62a) for moving expenses to be deductible, you have to have an “eligible

relocation”, defined in s. 248(1)b) an eligible relocation occurs (s. 248(1))

i) to enable a TP(1)to carry on a business or to be employed, at a new work location

that is in Canada (unless TP is absent from but resident in Canada), or

(2)to be a student in fulltime attendance enrolled in a postsecondary program at the location of a college or university, (also referred to as a new work location);

ii) the TP has to have resided at an old residence and after the relocation must reside at the new residence

iii) the old and new residences both have to be in Canada, unless the TP is absent from but resident in Canada (not for students s. 62(2)); and

iv) the new residence must be at least 40km closer to the new work location than the old residence was (40km by the shortest reasonable normally travelled route (Nagy; Gianakopoulous)

c) if all these conditions are met, can deduct as long as…s. 62(1)i) they were not paid on the TP’s behalf in respect of, in the course of,

or b/c of the TP’s employment, (can’t deduct if EMP paid or reimbursed you (unless included in income))(1)n.b. no mention of it being paid “by the EMP” – i.e. does not

matter if it was not your EMP who paid for the moving expense, you cannot deduct it (ex. a related corporation may have paid for the moving expense)

ii) they were not deductible under s. 62 in computing the TP’s income for the preceding year (i.e. not previously claimed),

iii) they do not exceed income from employment/business at the new work location or the amount of scholarships/bursaries included in computing income for the year under (s. 56(1)(n)); and

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iv) all reimbursements/allowances in respect of the expenses are included in computing the TP’s income

d) specific moving expenses which are deductible – s. 62(3):(a)travel costs, in course of moving(b)transport and storage costs of household goods(c) cost of meals and lodging for 15 days while moving (n.b. s.

67.1(1) 50% food limitation does not apply so you can deduct the full amount on food when moving)

(d)cancelling old lease(e)cost of selling old residence(f) legal fees (including GST) and property transfer tax; but you

cannot deduct the GST payable on the new home(g)interest, property tax, insurance premiums, utilities costs up to

$5000 while old house empty and left for sale – you have to be making reasonable efforts to sell old property [however, will not allow you deduct mortgage interest and cost of actually buying your new house]

(h)cost of revising legal docs – ex. drivers licence address + costs of reorganizing utilities – ex. connection fees for internet

e) you do not need to know moving expense cases, but you need to get a sense that the CRA is pretty generous with moving expenses due to the policy of promoting labour mobility

f) timing problems for movingi) what if you moved and then found a job? – that is OK can still

deduct (Abrahamsen)ii) even if your EMP asked you to move, but you waited 5 years before

you moved, that is OK tooiii) no time limit of how long to move when claiming moving expenses

(James D Beyette v MNR, TCC 1990)iv) ITA allows moving expenses where the TP moved 16 months before

he found employment (Abrahamsen v The Queen, TCC 2007)g) IT-470R para. 35 and 36: Employee Fringe Benefits

i) where an EMP reimburses an EME for the expenses incurred by the latter in moving the EME and his/her family and household effects either b/c the EME has been transferred from one establishment to another or b/c of having accepted employment at a place other than where the former home was located this reimbursement is not considered as conferring a taxable benefit on the EME

ii) where the EMP pays the expense of moving an EME and the EME’s family and household effects out of a remote place at the termination of the employment there, no taxable benefit is imputed

5) students and scholarships – virtually all scholarships and bursaries are now exempt (i.e. no tax on it) – so cannot deduct moving expenses associated with ita) s. 62(2) – moving expenses of students that are otherwise deductible

may be deducted if either the new residence or the old residence is in Canada; as long as one is in Canada, it’s sufficient

b) s. 56(1)(n) – includes scholarships, bursaries and other amounts in other

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income to the extent the amounts exceed the TP’s scholarship exemption

c) s. 56(3) – exempts all scholarships and bursaries under s. 56(1)(n) in connection with enrolment in an educational program that qualifies for the educational tax credit (s. 118.62) which requires that the TP be enrolled in a “qualifying educational program” at a “designated educational institution”i) qualified educational program = min 3 consecutive wks, 10 hrs per

wkii) designated educational institution = Canadian and foreign

universities and colleges, provided, if foreign, the program is at least 13 weeks long

6) home office expensesa) not deductible unless the workspace is where:

i) TP principally performance work duties (s. 18(12)(a)(i)); or(1)TP cannot deduct expenses incurred in travelling between his

home and his place of employment where the TP’s decision to conduct most of his employment-related activities from his home was made for his own convenience and not the EMP’s benefit (McCreath)

ii) exclusive home office use where TP regularly meet clients (s. 18(12)(a)(ii))

b) TP cannot get a current year loss by deducting work space expense as it is limited to the income for the year from business – s. 18(12)(b)

c) TP can carry over the loss for 1 year if not deductible in current year for the same business – s. 18(12)(c)

d) deductible amount should be based on a reasonable allocation of costs (s. 67) attributable to the home officei) this is usually determined by the amount of space occupied by the

office compared to the total usable area of the home and taking a proportionate amount as a business deduction

e) what if you work completely from home and you move?i) Bracken – cannot deductii) Templeton – can deductiii) the outcome today is ambiguousiv) perhaps if you can show you had a good reason to move – ex. moving

to an economic centre – you have a better argument to deduct7) overall policy = encourage unemployed peoples to move to a place where

they can be employedThomas Harry Benton v MNR, 1952 – primary domestic duties are not fully deductible even where income producing work is secondary in nature, but a portion of the portion of business expense can be deductedFacts: farmer had health problems, was able to manage his farm but hired house keeper, who did some work milking and washing milk utensils; Thomas tried to deduct her wagesHeld: cannot deduct; she provided personal services; that is primarily what she did and that is non-deductible; those relating to milking and washing milk utensils are deductible; Thomas argued that he could have done the housekeeping and hired someone to do farm work – and that wage would have been deductible, but Act looks at what you did, not what you could have donen.b. this case shows how difficult it can be to distinguish personal expenses from work expensesMNR v Dr. E. Ross Henry, EXCH 1969 – commuting is usually a personal or living expense that are restricted from deductions

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Facts: Henry performed his services at the Jubilee hospital; he also had office shared with other doctors elsewhere with a secretary that organized their billings; he would drive between the hospital and the office; he never saw patients at his home, nor at the office; MNR allowed him the cost of driving between hospital and office, and emergency trips to the hospital; but he wanted to deduct moreHeld: cannot deduct the back and forth between home and hospital; the home was not a place where he carried on business; thus travelling between home and hospital was not in course of carrying on business – it was simply commuting to his place of workMcCreath v The Queen, TCC 2008 – TP cannot deduct expenses incurred in travelling between his home and his place of employment where the TP’s decision to conduct most of his employment-related activities from his home was made for his own convenience and not the EMP’s benefitFacts: chairman of NS Liquor Corp performed 70% of his duties at his home office which was 55km from the NSLC office; T received per km allowance from EMP for travel expenses incurred in travelling between home and office

Deduction of Interest Expense1) s. 20(1)(c) – specific deduction for interest expense

a) s. 20(1)(c)(i) – allows a TP to deduct amounts paid or payable pursuant to a legal obligation to pay interest on borrowed money used for the purpose of earning income from a business/property

b) s. 20(1)(c)(ii) – permits deduction of interest payable on the unpaid balance of the purchase price of an asset used by the TP to earn business or property income

2) 4 part test (Singleton)a) the amount must be paid in the year or be payable in the year in which

it is sought to be deducted;b) the amount must be paid pursuant to a legal obligation to pay interest

on borrowed money;c) the borrowed money must be used for the purpose of earning non-

exempt income from a business or property – Bronfman criteria ….; andi) eligible uses of borrowed funds

(1)borrowed funds must be used for an IEP: no deduction is allowed for interest on funds used to produce exempt income, purchase life insurance, for personal consumption (personal residence) or to produce CGs

(2)TP must be able to trace the borrowed funds to an eligible use(3)a purpose of distributing capital to the beneficiary is not an IEP

(Bronfman Trust)(4)TP use for borrowed money can be for more than one purpose,

provided that one of those purposes is to earn income(a)an ancillary purpose of earning income is sufficient (Ludco)

(5)test to determine the purpose for interest deductibility = whether, considering all the circumstances, the TP had a reasonable expectation of income at the time the investment is made; sufficiency of the income is not a matter for the court absent a sham or window-dressing (Ludco)

ii) direct and current use(1)it is the current and direct use of the borrowed money that is

relevant in assessing its deductibility (Bronfman Trust)(2)indirect use (and economic realities of a situation) are irrelevant

unless a sham can be shown (Singleton)(3)current use – when the income earning source ceases to exist or

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the direct use changes, the related interest expense is no longer deductible (Attaie)

d) the amount must be reasonable, as assessed by reference to the first 3 requirements

3) note in particulara) timing (accrual vs. cash accounting) of the deduction;b) requirement for a legal obligation to pay the interest;c) IEP requirement;d) limitation where income which is earned is exempt;e) deduction permitted (subparagraph ii) where interest is charged on

unpaid purchase price rather than money borrowed;f) “unreasonable” interest charges will not be deductible; if within

commercial reality (going interest rate and arms length transaction) MRN will have hard time saying interest amount is unreasonable (Ludco)

4) in sum: if T can demonstrate he is within the Bronfman/Singleton criteria the amount and the fact that T is also hoping to have a CG is not going to impeded T’s ability to deduct the interest, even if T generates an overall loss

5) policy reason for allowing deduction of interest is to allow accumulation of capital that would produce taxable income

The Queen v Attaie, FCA 1990 – the court will look to the direct use of the borrowed funds not the indirect useFacts: T moved from Iran to Canada and borrowed funds to purchase a house where the house was initially being rented out; interest was deductible as it was used for earning rental income; T and family then moved into house; he had $200k that could have used to pay off mortgage, but he could make a higher rate of return in investment them in term deposits than paying the lower mortgage rate; T argued that he was using interest to gain income through investment of $200kHeld: mortgage interest not deductible; mortgage became to finance personal residence which was ineligible for deductionsThe Queen v Bronfman Trust, SCC 1987 – it is the current use of the borrowed funds which is relevant in assessing deductibility, not the original use; it is not sufficient for the T to show that it used the funds indirectly for the purpose of earning income if the direct use of the funds was not an eligible use; one must consider the direct and current use of borrowed funds to determine if they have an income earning purpose in order to have the interest expense be deductibleFacts: Bronfman had family trust for all their children and grandchildren; wanted to make a distribution of capital to a beneficiary, Phillip Bronfman; Trusts are taxed as individuals even though they are not persons; the Trust held a large number of shares in companies that were controlled by the Bronfman company; the Bronfmans borrowed from a bank, and gave it to P; wanted to deduct the interestHeld: not deductible the interest deduction was introduced to encourage the gaining of capital, to earn income onus on TP to trace funds to identifiable use – i.e. must show that the borrowing occurred and was

used for the purpose of earning income from business/property in IDing which interests are deductible

must be used for IEP – here, purpose of distributing money to beneficiary is not an IEP the relevant purpose is the purpose for which borrowed funds are currently being used for (b/c

you may borrow for one purpose and then after a time use the funds for something else) – current use must be for income (does not matter if it was not originally for earning income)

has to be direct, not indirect, use of money to earn income Bronfman argued that they could have sold the shares, paid cash to the beneficiary,

borrowed money from bank and then buy the shares back again interest would have been deductible – so why can’t they deduct it in this instance?

court said does not matter – the courts have to look at what TP actually did, not what TP might have done

Singleton v The Queen, SCC 2002 – established s. 20(1)(c)(i) contains 4 elements; absent a specific provision of the ITA to the contrary or a finding that the evidence is a sham, the TP’s legal relationships must be respected in tax cases; if a direct link can be drawn between the

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borrowed money and an eligible use, then the money was used for the purpose of earning income from a business or propertyFacts: Singleton was partner in law firm in Vancouver; he wanted to buy a house and financed the law firm with at least $300k of tax paid contributions of his own money; he wanted to take out the $300k, and then borrow to replace it; now Singleton has an interest expense at the bank, and he can deduct it from income from practiceHeld: yes, can deduct; the problem is that the cheques flew back and forth from the bank, the company, and the owner of the house – problem with tracing; court finds that making choice between buying house with tax-paid savings or borrowing to buy the house should be the TP’s choiceDissent: the true economic purpose of the borrowing was to buy the house – why should he get to deduct when buying the house is not an IEP?O’Brien: why this case questions Bronfman – you do not actually look at the economic realities of the transaction, as Bronfman would have it; i.e. Singleton – look at the form of the transaction, unless it is a sham (false documents) the court will look at the legal relationships; this follows Shell – you cannot ignore the form unless the Act says otherwiseLudco Enterprises Ltd Brian Ludmer, David Ludmer and Cindy Ludmer v The Queen, SCC 2001 – s. 20(1)(c)(i) can apply when a TP uses borrowed money to make an investment for more than 1 purpose, provided that 1 of those purposes is to earn income; proper “test to determine the purpose for interest deductibility under s. 20(1)(c)(i) = whether, considering all the circumstances, the TP had a reasonable expectation of income at the time the investment is madeFacts: Ts’ taxes from 1981-1985; Ts borrowed $6.5M from Canadian Chartered banks, and used money to fund 2 companies operating out of tax havens (Bahamas); the 2 companies buys federal gov. bonds from Canada and US; the gov. bonds are generally exempt from the withholding tax; the interest keeps building up in Bahamas tax free (since Bahamas have no tax); however, the interests are being deducted by Ts in Canada, since they are paying interest in acquiring interest in companies; dividends were paid, but were far lower than the interest expense deducted in Canada; 1984 this scheme was eliminated, and so Ts sold their shares; realized a CG of over $9M; MNR argued interest not allowed to be deducted, as the interest was not incurred to earn income from property but for deferring taxes and converting income in CGsIssue: can you deduct interest when you buy shares that pay a dividend?Held: allowed to deduct court solved the problem using SI of s. 20(1)(c)(i) rejected judicial innovation in interpreting ITA; ITA has specific and general anti-avoidance

provisions, and so courts should not interpret the Act in a specific way, when it is open to Parliament to change the Act

adopts Bronfman 3 tests of when you can deduct interest: use for which interest deduction came from must be eligible has to be current use that you look at it has to be a direct use

so question here = is the purpose to earn income, or was there another purpose? here, there was $9M CG vs. $600k dividends MNR argues purpose of borrowing was not to earn income, but to generate CG s. 20(1)(c)(i) applies – TP can have more than 1 purpose – i.e. can intend to both earn income

and CG as long as 1 of the purposes is to earn income, that is OK that income is an ancillary purpose is irrelevant if Parliament wants the rule to be: “must have earning income as dominant purpose to allow

deduction” – they can write that in what do we mean by “income” (recall ITA does not define “income”)

court applies principles of SI and finds that the “plain meaning” of “income” does not support income meaning “net income” O’Brien: this is surprising given s. 9(1) says your income is your profit from business or

property if income in s. 9(1) is profit, why is income in s. 20(1)(c) not profit? court said there is no quantitative test implied, and there is no test for sufficiency of income –

provided there is income, and absent a sham (i.e. concealment or dishonest reporting), courts should not be concerned over the sufficiency of income expected or received

objective of s. 20(1)(c) = encourage economic growth by allowing TPs to deduct interest costs associated with accumulation of capital

it is sufficient for TP to have expectation of gross income, as opposed to net income n.b. Ludco predates Stewart, where REOP was removed as test – but here we are talking

about deductibility, and so we do not have a question of source applied: Ts borrowed at reasonable rates, banks were willing to lend (so banks must have had

confidence in them) – so transaction must have been reasonable interest allowed to be deducted

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Stewart v The Queen, SCC 2002 1st MNR argument: S could not deducted his losses from investments in the condos b/c he had no

REOP court: we will not penalize TP for making bad businesses judgment; even if TP has losses, can

still deduct 2nd MNR argument: the condo market crashed and S’ losses were higher than he could sustain – can

he deduct the interest under s. 20(1)(c)?; MNR argued his primary purpose was get CG and not earn income, and the interest expense was too high in the circumstances court: it was all arms length market rate interest; the people who put the investment package

together got the backing of the banks, meaning banks thought this investment was reasonable; the interest rate was standard and therefore the interest claimed at deduction stage was not unreasonable although one of his purposes was to realize a CG eventually, the other purpose was to have

rental income, or at least rental revenue thus, Stewart follows Ludco (albeit at a smaller scale)

Policy Reasons for Denying Deductions (Illegal/Unethical Conduct)1) sometimes courts prohibited a deduction for public policy reasons but SCC

in BC Egg case held that it is Parliament’s place to expressly change the ITA to enact public policy and not the courts place

2) ex. s. 67.1(1) foods/beverages 50% limit on deduction this is a policy choice; while 100% was actually incurred, policy thinks allowing 100% is too much

3) another policy issue argued many times is TP carrying on illegal business should not be able to deduct the expenses – ex. Eldridgea) in sum, in principle, no reason to allow not deduction for illegal

businesses – the problem is often one of evidence, as courts will not easily accept testimonies from criminally charged individuals on how much they spent on their business as credible

4) bribery of certain officials: s. 67.5 – no deduction of bribes5) prohibited offences: bribery of judicial officers, MPs, MLAs – CC.119;6) bribery of justice, peace officer, police commissioners – CC.1207) frauds on government – CC.1218) municipal corruption – CC.1239) selling/purchasing office – CC.12410) influencing/negotiating appointments or dealing in offices – CC.12511) fraudulently obtaining transportation (bribing fare takers) – CC.39312) secret commissions – CC.42613) conspiracy – CC.46514) s. 67.6 – no deduction of fines or penalties

a) however, damages and K penalties are generally deductible if they meet the general test of deductibility (Imperial Oil)

15) s. 67.5 – no deductibility of illegal paymentsMNR v Eldridge, EXCH 1964 – court will allow argument and evidence of deductible expenses even for illegal businesses; expenses must be for during when illegal business was running not after the business was closed downBackground: at this time, prostitution was completely illegalFacts: E ran call girl operation in the late 1950s; when it was shut down, E was re-assessed for taxes; E made a net worth estimate of what she had earned and what her expenses were; E said she had no records (but without records, MNR will make an estimate, and it is up to the TP to disprove that estimate if TP disagrees) [background policy issue = why should illegal business owner not have to pay tax when legal business owners do?]Issue: which expenses from illegal business were deductible?Held: where E could prove the expenses, court allowed it (but E, of course, had issues of credibility during his testimony)65302 BC v The Queen (BC Egg Case), SCC 2000

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Facts: company over-produced eggs (and overproduction on quota means you have to pay an overproduction levy); company claimed deduction for that levy they had to pay; was denied deduction for tax purposesHeld: deductible; over-producing eggs is not exactly the most immoral thing you can do; it is not up to court or the TP to decide which side of the moral line a business decision falls; it is Parliament’s place to expressly change the ITA to enact public policy and not the courts placen.b. Parliament subsequently enacted s. 67.6 – there is a blanket prohibition: no deduction of fines or penalties

Capital vs. Current Expenditures1) s. 18(1)(b) – general prohibition of deductions on outlays and capital2) essentially whenever a business makes an expenditure that does not occur

all the time, the Q = is this outlay of capital that cannot be deducted under s. 18(1)(b), or is it a current expense?

3) capital outlays are usually expected to last a long time, as opposed to things like rent, utilities etc. (i.e. day to day expenses)

4) basic test = does the expenditure provide an enduring benefit to the business or property source?a) that the expense is large does not automatically mean it is an outlay of

capital (Imperial Oil)

b) creation of a new asset is likely capital expenditure (British Insulated)c) a repair is a current expense even if repairs are extensive, high cost, or

take a long time (Canada Steamship)d) an upgrade, where the replacement causes the thing replaced to

change in character (different in kind), is a capital expenditure; upgrades are common with physical assets (Canada Steamship)

e) repairs do not become disqualified as repairs b/c of technological changes unknown when original structure built; repairs do not only have to be due to wear, aging, or deterioration but can be due to hidden defect if not an upgrade that has greatly improved asset from original condition b/c of its newly-found resistance to those factors that caused its deterioration (Shabro Investments)

f) even if repair is so substantial it looks like replacement of the asset, does not mean it is automatically not a repair (Gold Bar)

g) where repairs are forced on a TP, he does not have to ignore advancements in technological changes in making repairs (Gold Bar)

5) in sum, judges are trying to distinguish getting something new and improved vs. what was there already – how they come to that conclusion is suspect sometimesa) ex. painting suites when tenants change – this is very commonly done and normally fully

deductibleb) ex. replacing banisters, carpets and stairwells – these wear out all the time and need replacing

every few years – normally accepted as repair/maintenancec) ex. painting gravel parking lot – seen as capital outlay, as one is significantly upgraded from the

otherd) ex. new furnace – capital outlay, just like the boiler

6) s. 111(1)(a) – carry forward 20 and back 3 years of non-CLsa) non-CLs can be used against all income losses from once source

reduce total taxable from all sources – i.e. they set off each other at s. 3(d), but not until then; before s. 3(d) calculation, must keep income/deductions of each source separate

British Insulated and Helsby Cables Limited v IRC, UKHL 1926 – when an expenditure is

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made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, there is a very good reason for treating such an expenditure as properly attributable not to revenue but to capitalFacts: in setting up a pension fund the EMP (IRC) makes a large lump sum into pension fund and tries to deduct as a current business expenseHeld: it was a capital expenditure; whether an expense is current or a capital expense is a QOF; here, lump sum payment into was not a gift but to establish the pension fund so to obtain for the company a lasting and substantial advantage to retain happy staff – thus capital expenditure; court gives another ex.: ship building firm pays large amount to have a dredge (i.e. dig a large hole), which enhanced its ability to launch ships this was a large rare expenditure that provided an enduring advantage to the ship building business capital outlayCanada Steamship Lines v MNR, EXCH 1966 – one of the leading cases on capital outlay vs. current expenditureFacts: 2 types of expenditures that T claimed as current expenditure: 1) replacing floors and cargo dividers, caused by wear and tear and 2) replacing boiler in shipIssue: whether expenditures to fix ships and to replace boiler in a ship considered business or capital expensesHeld: expenditure to fix ships was expenditure, but boiler was capital expense ships themselves are capital assets large expenditures to fix floors and walls and other maintenance considered business expenditure cost of repairs are current expenses and would not be a capital outlay merely b/c the repairs

required are very extensive or b/c the cost is substantial money use to acquire an asset is an outlay of capital similarly, money laid out to upgrade an asset is an outlay of capital; upgrade is a replacement by

something so different in kind from the thing replaced that it constitutes a change in the character vs. repair of physical effects resulting from wear and team or accident is business expense

here, boiler as machinery would be usually capital asset by itself regardless of installation in ship; boiler could have been installed in a factory as a distinct and separate capital asset

O’Brien: on the boiler, difficult to distinguish from wear and tear – you do not replace boilers every year, of course, but how is it different from walls/floors?; court basically thinks b/c the boiler is something you can re-sell as a whole (vs. you cannot really sell a “floor” or “wall”), it is capitalThe Queen v Shabro Investments Ltd, FCC 1979 – repairs do not become disqualified as repairs b/c of technological changes unknown when original structure built; repairs do not only have to be due to wear, aging, or deterioration but can be due to hidden defect if not an upgradeFacts: building initially rested on garbage fill; fill collapsed and caused lots of damage to building; replaced fill with steel piles and replaced concrete slab floors; also had to put in new water lines, drain tiles due to damage; T claimed this was repair for maintenance expense to his building (i.e. claims as current expense under s. 9(1)); gov. held this was such a big repair that it amounted to acquisition of new assetIssue: whether replacement of a substantial part of the lower floor in a 2-store building was a repair or upgradeHeld: it was an upgrade – not deductible court admits there is no single test to distinguish repair vs. new capital it is true that the steel piles is a capital outlay, but the concrete slab floor is also a capital outlay

the court grouped the two into one thing and called whole thing a capital outlay faulty design that results in damage does not necessarily mean that every rectification of that

design is going to be a capital improvement, but hidden defects are no different from wear/tear requiring repairs

however, must compare that to improving something the water lines, drain tiles etc. – sent back to trail for reconsideration (at trial, held not deductible)O’Brien: court probably thought water lines, drain tiles etc. were deductible – they were there before, and only needs to be replacedGold Bar Developments Ltd v The Queen, FCTD 1987 – where repairs are forced on a TP, he does not have to ignore advancements in building techniques and technology in carrying out the workFacts: T owned an apartment building where brick veneer was falling off due to inferior work of original subcontractor; on advice of prof. engineers, T made repairs using metal cladding instead of brick veneer at cost of $242kIssue: if you repair to the point of replacing one entire wall, is it a repair or a replacement?Held: repair (on the facts) capital improvement usually mean something knew that was not there before; so test of whether the

asset is “improved” is not necessarily the right way to phrase it another approach of “this will only happen once in a lifetime” is also not useful – it really depends on

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the lifetime of the asset ex. replacing a roof – you may not do it every year, but you will eventually have to; so replacing a roof should be in principal a repair, but very often CRA sees it as so big, that they call it a replacement

what is the purpose of the TP’s action – is he trying to significantly upgrade the property vs. trying to keep the property usable (which is more like repairs and maintenance)

here, TP did not have any choice b/c the bricks were falling off, and eventually the whole building would become unusable; that it was faulty workmanship in the beginning does not mean it cannot be a repair now Minister argued the cost of repair was too substantial, and so must be seen as an upgrade but court was not persuaded – they looked at the $242k relative to the value of the whole

building, which was $8M – not so significant in the big scheme of things the nature of what TP got did not really change

O’Brien: c.f. Shabro – saw replacement of floor as a package, but arguably you could have separated them

Capital Gains & Losses1) CGs and CLs are realized when the capital property is disposed of

a) where the TP dies in a tax year, all his CGs and CLs are deemed to be realized at FMV (s. 70(5)(a)), but can be rolled over to a spouse (s. 70(6))

2) contexta) s. 9(3) – specifies that income or loss from a source that is property

does not include CG or CL from the disposition of that property – this is probably set out “for greater certainty”, since 3(a) & 3(b) already separate these 2 categoriesi) thus, TCGs (net of ACLs) are brought into the calculation of taxable

income by 3(b)b) n.b. for the purposes of this course, it is assumed that the CG tax rate

has always been, and will always be, 50%3) def. of CG and CL – ss. 39(1)(a)-(b)

a) CG/CL is gain/loss from disposition of any property as determined under s.39(c), but excludes some gains/losses

b) CG – s. 39(1)(a)i) first, must be a disposition (i.e. ceasing to own it)ii) second, there are exclusions from def. of CG – if you dispose of

property, and the gain is included in coming income from business/property (could never be employment) excluded from CG

iii) thus, CG is a default basket to catch gains from property, other than gains recognized in business/property

iv) ex. profits from ACNT, or disposing inventory excluded from CGc) CL – s. 39(1)(b)

i) excludes losses that would be losses from a source – ex. loss from ACNT would be a loss from business

ii) important exclusion is also disposition of depreciable property you cannot have a CL from depreciable property(1)depreciable property = tangible property used in carrying on

business or earning income from property(2)if depreciable property is disposed of at a loss, you do not get CL,

but you get an income write-off(3)you can get a CG on depreciable property – it is not common, of

course (but may occur if, for ex., the property has become rare and hard to get)

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4) calculation of CG and CL – ss. 40(1)(a)–(b)a) CG = POD – (ACB + expenses of disposition) [n.b. there will not be ACB

in this course] – s. 40(1)(a)(i)b) CL = ACB – (POD + expenses of disposition) – s. 40(1)(b)c) ACB = where it is depreciable property, amount taxable to TP =

purchase price of property = capital cost (the amount expended to acquire something) = expenses directly related to the acquisitioni) i.e. actual price paid + expenses related to paying the price (ex.

GST/PST, legal fees directly associated with the acquisition – ex. you buy land for purpose of development; price of land is $50k; property transfer tax is $8k; appraisal fee; title search; lawyer fee)

ii) there is no provision in the Act that says all these things are included in ACB, but this has been the policy

d) POD = sale pricee) POD – (ACB + expenses of disposition) = if positive gain; if negative

loss5) TCGs and ACLs

a) ss. 38(a)-(b) – exclude 50% of the gain or loss from the tax systemi) i.e. dividing in half occurs after the calculation under s. 40(1)

b) ss. 111(1)(b) – carry forward forever and back 3 of net CLs (net CLs = the amounts by which the ACLs for the year > TCGs for the year)

c) corps. do not die, but people do on year of death, s. 111(2) – net CLs convert into non-CLs (if after ACLs are offset against TCGs, there is still some ACL left) these can reduce TP’s income from sources for the stub year (year of death) and previous year

6) property and capital propertya) s. 248(1) – “property” means property of any kind whateverb) s. 54(b) – PUP (i.e. recreation homes/cabins) can be considered capital

propertyc) s. 54(a) – depreciable property is usually fixed physical property used by

the business to earn income (ex. ships, buildings, equipment); they have a usefulness over an extended period of time; depreciable property is capital property

d) 2 big exceptions to capital property : 1) ACNT & 2) inventorye) recall distinction between capital acquisition/disposition, ACNT, carrying

on a business of buying and selling property as inventoryPolicy for Preferential Taxation of Capital Gains

1) can only set CLs against CGs, but the effective rate applied to net CGs is ½ what it would have been if it was income from sources, as an individual

2) in BC, the top marginal rate, federal and prov., is 46.8% – income from employment/business/property, but effective rate from net CG is only half of that, 23.4%

3) what justifies this rate?4) until 1972, CGs were outside of the ITA and therefore exempt5) 3 major policy concerns for changing the historical approach:

a) greater equity:i) vertical – richer people tend to create higher CGsii) horizontal – CGs are treated more closely to equivalent income

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earnedb) neutrality: makes the system more neutral by reducing the incentive for

T to structure their transactions to look like capital transactions (still a benefit, but less than historically)

c) certainty: TPs should be able to determine tax consequences and plan for iti) n.b. tax is most commonly litigated area, so may not have achieved

this goal6) disadvantages of CG from policy perspective

a) equity – offended as CG usually acquired by high net worth individualsb) neutrality – offended as preferential treatment of CG is a distortion of

market forces as it causes stock market inflation, causes a lot of tax planning, and encourages individuals to leverage themselves to seek CG

c) simplicity – not administratively efficient as it is the most litigated area of tax law; continued problem of TP’s trying to capitalize income and trying to deduct CL as business losses

7) advantages of CGa) only ½ of it is taxedb) not taxed until disposal – and yet you can borrow money against that

propertyi) ability of TP of when to dispose an asset and recognize a CG/CL is

valuable b/c you can match your CGs/CLs to ensure that you do not pay tax on the years that you realize CGs (i.e. realize your losses at the time most useful to you) (ex. usually stock market dips in Dec. – people want to get rid of their bad shares and use those losses against their CGs for the year)

c) lifetime exemption for CGs – fishing/farming investments up to $750ki) applies to shares of small private companies and farm property when

disposed of to the next generation – Canadian small business can be passed on CGs free up to that $750k amount

8) full taxation of CGs would discourage investment by individuals and corporations

9) CLs receive less relief than other types of losses b/c generally CLs are deductible only from CGs and not from other sources of income

10) main policy reason for CG = it encourages capitalism and investment in general; the accumulation of income producing capital is seen as desirable b/c it creates wealth and increases the income tax base

Identical Properties1) s. 47(1)(a)-(b) – the one place where the Act directs on how to calculate the

ACB2) s. 47(1)(a) = special rule of determining ACB of identical properties, which

are a type of capital propertya) ex. shares in a class – they are exactly identical to each other b/c they have the same rights and

restrictionsb) ex. mutual trust unit – each unit is issued to an investor who will buy it for a particular price; idea

is to diversify risk in securities markets by buying a unit (which is unit in all the underlying property)

3) the rule = ITA does not allow TP to choose which ACB to use – must average ACB if bought the identical properties at different times and at different values

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Part of a Property1) s. 43(1) – ACB of part of a property when disposing of part of a property,

the ACB immediately before the disposition of that part is the portion of the ACB of the whole property that can reasonably be regarded as of the whole

2) ex. parcel of land that is 2 acres and bought for $2k, if you sell 1 acre, ACB of that 1 acre is the reasonably attributed portion of ACB of the whole that the 1 acre is of so if each acre is reasonably the same, each acre’s ACB is $1k

3) in sum, calculate the ACB of that part proportionately based on value, reasonably apportioned

Disposition and Proceeds of Disposition1) anytime you dispose of property and you are entitled to receive something

for it – that will be clearly a disposition2) need not be voluntary – ex. could be an expropriation (Bellingham) or by

operation of law (Compagnie Immobilière)3) you do not have to have proceeds of disposition to have a “disposition” (ex.

if the land is destroyed, if the property runs away – can be treated as disposed of)4) SCC has said that meaning of “disposition” is to be construed very broadly;

the def. in s. 248(1) is not exhaustive; expressions must bear both their normal meaning and statutory meaning (Compagnie Immobilière)

5) disposition (s. 248(1)) includes any sale or exchange for PODa) (a), where a security is redeemed, acquired, or cancelledb) (b)(i), where settlement or cancellation of a debt obligationc) (b)(ii), where property is destroyed, lost, or abandoned (Compagnie

Immobilière), andd) overall where possession, control, and all other aspects of property

ownership are relinquished (Bellingham; IT-460) with exclusionsi) exclusions = where change in legal title but no change in beneficial

ownership (e), transfer of property to secure a loan or returning property that was used as security (j), where issuing a debt obligation such as a bond (l), or issuing of shares (m)

6) “proceeds of disposition” – s. 54, it includes…a) sale price of property soldb) compensation for property unlawfully taken – ex. if something you own

is stolen, and you receive insurance proceedsc) compensation for property destroyed or lostd) compensation for expropriatione) compensation for property injuriously effected, lawfully or not – i.e.

when someone does something that affects your property, even though they do not take your property

f) compensation for property damaged and any amount payable under policy if insurance, except where the compensation has been used for repairi) ex. where Imperial Oil damages US Steel Ship; if US ship was a Canadian TP, the

compensation they received could be treated as proceeds of disposition of the ship, if the ship was really badly damaged; but if ship was only partially damaged and used the money for repair – not treated as disposition (b/c you can deduct the repair)

g) in principle, any right that is convertible into cash is likely to result in a disposition when converted (RCI Environment Inc)

The Queen v Compagnie Immobilière BCN Ltée, SCC 1979 – ceasing to be owner by operation of law is a disposition

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Facts: a term of a lease came to an end; the interest in the property that a tenant held disagreed by operation of law; the tenant no longer had any “property” so their interest in the property was gone; normally this is not CG issue, but was in this case

Deemed Dispositions and Deemed Proceeds1) deemed disposition = where Act deems TP has disposed property that TP

has not really disposed of2) normally, gains on property are not taxed until realized (i.e. disposed)3) deemed dispositions override this4) the rules ensure that tax consequences occur b/c of a particular action

Lottery Winnings1) s. 40(2)(f) – cash lottery winnings (and cost of tickets) are deemed to be

excluded from CG2) s. 52(4) – lottery winning property is deemed to be acquired at FMV (=

ACB)Ceasing/Becoming Resident of Canada

1) deemed disposition/reacquisition of property, with some exceptions, upon emigration and immigration [see p. 14]

2) n.b. exclusions from deemed disposition for immigration is on real property and shares whereas emigration is only on real property; exception for real property as s. 2(3)(c) states a non-resident is taxable for dispositions of taxable Canadian property

Gifts and Sales Below FMV to Non-Arm’s Length Persons1) gifts

a) gifts are real dispositions, even though no proceeds of dispositionb) they have deemed consequencesc) POD deemed at FMV (s. 69(1)(b)(ii))d) ACB deemed at FMV (s. 69(1)(c))e) a sale at an undervaluation is not a gift (The Queen v Littler, FCA 1978)

2) non-arms length salesa) s. 69(a) – where TP acquires anything from person in non-arms length

way in amount excess of FMV, TP deemed to acquire at FMVi) i.e. s. 69(1)(a) – where the selling price > FMV, the vendor’s POD is

the selling price but the purchaser’s ACB is deemed at FMVb) c.f. s. 69(1)(b)(i) – where the selling price < FMV, the vendor’s POD will

be deemed FMV but the purchaser’s ACB will be actual selling costc) thus, better to give it as a giftd) parties may agree to “price adjustment clause” where they agree to

accept the ultimate determination of FMV (by CRA or appeal, for ex.) if it should be different from their own

e) CRA’s guidelines on price adjustment clauses are in IT-169f) if cannot agree on FMV “battle of experts” (Nash v Canada, FCA

2006)3) related individuals

a) s. 251(1)(a) – related persons are deemed not to deal at arm’s length, even if in fact their interests are in conflict

b) s. 251(2)(a) – defines related persons as individuals connected by blood, marriage, common law partnership (CLP) or adoptioni) blood relationship = one person is the child or descendant of the

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other (i.e. a child is related to parent, grandparent, great-grandparent etc., and vice versa) or one person is the brother or sister of the other (s. 251(6)(a))

ii) however, the relationship of aunt or uncle to nephew or niece, and cousins are not included in related persons but may be a QOF under other non-arms length transactions

c) s. 248(1) – CLP = cohabiting in a conjugal relationship…i) for 12 months orii) if you have a child together

(1)you remained a deemed CLP until you live apart for 90 days due to a breakdown in the relationship (the fact that you are not living in same house does not matter if it is for a reason other than relationship breakdown)

(2)n.b. policies of neutrality and equality served by treating CLP same as spouses

d) spouses (s. 251(6)(b)) and CLPs (s. 251(6)(b.1)) deemed related to each other, and to the persons who are blood relations of their spouse or CLPi) this means “in-laws” are relatedii) also, adopted individuals (s. 251(6)(c))

4) other non-arm’s length transactionsa) in cases other than related persons, it is a QOF whether persons not

related to each other are at a particular time dealing with each other at arm’s length

b) requires an examination of all of the facts and circumstances existing between the 2 persons at the relevant time

c) unrelated parties have been held not to deal at arm’s length when: i) there is “a common mind” which directs or controls the bargaining

for both sides (a person and a corporation of which he is a less than 50% shareholder, but a director and officer with influence over the other directors and officers) or

ii) the 2 persons act in concert without separate interests (i.e. close friends that work together to create a tax result

iii) business partners may or may not be at arm’s length, depending on the circumstances of the transaction and whether they have separate interests

iv) EMEs are normally at arm’s length from their EMP, unless they control, or are members of a family, that controls the corporate EMP

5) related corporationsa) s. 251(2)(b)(i) – a corporation is related to the person who holds voting

control, meaning enough shares to elect the board of directors, normally over 50%

b) s. 251(2)(b)(ii) – a corporation is related to a person who is a member of a related group (each member in group is related to other members) that controls the corporation

c) s. 251(2)(b)(iii) – a corporation is related to any person related to either the person who controls it, or any member of the related group that controls it

d) s. 251(2)(c) – any 2 corps. if controlled by same person/group of persons57

e) ex. A controls 100% of Xco but only controls 25% of Yco, and Xco controls 75% of Yco A is deemed to be related to Yco

f) ex. B is CLP of A B is deemed related to both Xco and YcoDeemed Disposition on Death

1) when a TP dies, they are deemed to have POD at FMV right before death of all capital property (s. 70(5)(a))

2) anyone that acquires the deceased TP’s property has an ACB at FMV (s. 70(5)(b))

3) n.b. on death all capital property disposed so any other CLs should be claimed; also any past net CLs would be claimed upon death (s. 111(2))

Rollovers for Spouses/Common Law PartnershipsInter Vivos Transfers

1) s. 73(1) – transfer of capital property to a TP’s spouse or CLP will automatically benefit from rollover treatment (POD deemed to be ACB of the transferred property) unless the transferor elects otherwise

2) thus, ACB of transferor rollovers to transferee3) acts as exception to non-arms length gift/sale deeming rules (s. 69(1)) per

“For purposes of this Part”4) n.b. all transactions fall under s. 73, even if transferee pays FMV so if

transferee pays FMV, transferee will want transferor to elect out, b/c transferee wants full ACB

5) requirementsa) transfer of capital property (whether gift or sale) – s. 73(1)b) both transferor and transferee are Canadian residents – s. 73(1)c) transferee is the spouse / CLP or former spouse/CLP if the transfer is in

settlement of rights from marriage or CLP (divorce or separation) – s. 73(1.01)i) recall CLP (s. 248(1)) = cohabiting in a conjugal relationship a) for 12

months or b) if you have a child together(1)you remained a deemed CLP until you live apart for 90 days due

to a breakdown in the relationship6) electing out

a) if sale for amount > than ACB to spouse spouse ACB automatically deemed to be the original transferor ACB unless electing out

b) however, when electing out, s. 69(1)(b) applies to make ACB FMVi) this causes the transferor to realize a CGii) a prime reason for electing out is where there are unapplied past net

CLs that one wishes to apply to the CGiii) this is b/c net CLs do not transfer

7) on marriage/CLP breakdown, s. 73(1.01)(b) allows them to divide their property on a rollover basis and defer realization for tax purposes of the gain/loss on the property until the recipient ex-partner disposes of it

8) spousal attribution rule – s. 74.2(1)(a) – idea is to keep spouses from shifting capital properties with accrued gains between the couplea) each member of the couple is taxed as an individualb) the attribution rule attributes the entire gain back to the transferor, and

the transferee spouse is deemed not to realize that gaini) in any given year, the net taxable CGs are all set off against each

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otherii) the ACL is also attributed back to the original owner of the 2 spousesiii) this occurs with LPPs as well

c) this rule does not apply if , when the transferee spouse disposes of the property, the relationship is over, either due to death or breakdown of relationship (for more than 90 days)i) idea is to transfer property on deferred basis while the relationship

existsii) if relationship ends, the transferee spouse will keep the gain/lossiii) if relationship does not end, it is attributed back to transferor

d) policy = prevent wealthy spouse from transferring property to not wealthy spouse in planning tax – i.e. prevent income splitting

Transfer and Rollover Upon Death – s. 70(6)1) recall s. 70(5) – deemed disposition at FMV on death, and person who

inherits gets the ACB at FMV2) s. 70(6) rollover rule = if the TP’s spouse receives the property, however

he/she receives it (ex. right of survivorship, or a will) – if it is really a consequence of the death, ss. 70(5)(a)-(b) do not apply

3) therefore, the CG/CL is deferred to avoid paying tax if the spouse is to get the capital property on death

4) policy = do not want widows paying tax and not have enough to live on, b/c then the state will need to support them through subsidies; better to defer until the surviving spouse dies to tax

Personal Use Property and Listed Personal Property1) test for all personal property = is it for personal enjoyment?

a) apportion if used partly for personal, partly for businessb) n.b. if you change the use of something from person to income earning,

there is deemed disposition and re-acquisition at FMV [no need to know this for exam]

2) PUP (s. 54) = capital property owned by a TP primarily used for personal use or enjoyment of the TP or any individual related to TP (i.e. family home, recreational property, clothes, personal effects, hobby effects, cars, boats, furniture, and LPP)

3) LPP (s. 54) = different from regular PUP as it is collectible so its value does not decline with usea) but dealing in LPP will make it a ACNT or a business as it is no longer

personal property but business propertyb) LPP is

i) print, etching, drawing, painting, sculpture, or other similar work of art (n.b. art can be ambiguous)

ii) jewellery,iii) rare folio, rare manuscript, or rare book,iv) stamp, orv) coin; (n.b. sports card collection likely is not LPP)

4) PUP CL deemed as nil except LPPa) CL on PUP is deemed to be nil (so no deduction for personal

consumption (s. 40(2)(g)(iii)) with 2 exceptions:i) s. 41 – the LPP exception

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(1)s. 41(2)(a) – a TP’s net gain from dispositions of LPP = total gains from LPP – total loss from LPP; total = you can set off against different types of LPP

(2)s. 41(1) – for LPP you net the amounts against each other first and then divide by 50% [c.f. whereas for CG you take your TCG (50%) and setoff against TCL (50%)]

(3)s. 41(2)(b)(iii) – limits the deductibility of LPP losses and the word “exceeds” in s. 41(2)(a) ensure it is a positive amount(a)LPP loss = excess of net loss for total disposition of LPP (s.

41(3))(4)s. 41(2)(b) – a TP can carry forward a LPP loss for 7 years and back

3(5)s. 41(2)(b)(ii) – you must use older LPP losses before newer ones(6)s. 41(2)(b)(i) – can only claim a LPP loss amount that hasn’t

already been usedii) s. 46(1) – a $1000 exemption applies to disposition of PUP (including

LPP)(1)where POD < $1000 and ACB > $1000, POD is deemed to be

$1000 – s. 46(1)(b) lessens the CL(2)where POD > $1000 and ACB < $1000, the ACB is deemed to be

$1000 – s. 46(1)(a) lessens the CG(3)for disposition of PUP where both POD and ACB < $1000, both

POD and ACB is deemed to be $1000 (s. 46(1)(a)-(b)) the CG is nil

(4)effectively, any PUP/LPP transaction under $1000 out of the tax base

(5)policy = simplicity – if every time you sold something small you had to calculate tax on it, it would be too cumbersome

b) n.b. a rare gain on PUP (other than LPP) would be taxable as a CGc) policy for excluding loss = it is a personal loss and not an economic one;

however LPPs are considered a holding of wealth so losses and gains are taxable / deductible

5) disposition as a set anti-avoidance rules for PUP – s. 46(2)-(3)a) ensures people do not abuse the $1000 rule (ex. claim $1000 ACB for item X by

splitting X up into many parts – this happened often with stamp and coin collections, or anything sold as a set)

b) s. 46(2) – where TP has disposed of part of PUP owned by the TP and has kept another part of the PUP, you take a proportion of the $1000 and apply it to calculating the ACB, if the ACB is under $1000

c) get this “part” from s. 46(3) – you can try to get out of this by selling piece of stamp collection to a group of people, who agreed to amalgamate the stamp collection by the end (i.e. not at arms’ length) deemed to be a single PUP and each disposition is a disposition of the part of the whole

d) how the CRA approaches thisi) first, property must be type that would be normally disposed of as a

setii) whether a number of articles constitute a set is a QOFiii) the set should

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(1)be produced together(2)roughly produced at same time (with exceptions – ex. coins)(3)ordinarily, if they are worth more as a set than they are

individually most important factor(4)more than one disposition(5)aggregate FMV must be more than $1000

Principal Residence Exemption1) the exemption = disposition of 1 housing unit is exempt from CG

calculation for a member of a family unit composed of family with children under 18, and exemption is proportion to number of years inhabited/residence

2) what is a PR? (s. 54)a) PR = particular property that is a housing unit (can include recreational

residences, and a mobile home), a leasehold interest in the housing unit, or interest in shares of capital stock of co-op.

b) includes land underneath housec) and includes the land immediately around the housing unit that can be

reasonably regarded as contributing to enjoyment of housed) the ½ hectare rule if more than ½ hectare, is not part of PR, and not

eligible for PRE unless TP establishes it was necessary for use/enjoymenti) i.e. first ½ hectare assumed to be eligible for PRE; but if you have

more than ½ hectare, TP must show it was necessary for use/enjoyment of housing unit as a residence

ii) test = is it necessary to the residence?(1)test for necessity of excess land is to objectively (Stuart Estate v

The Queen, FCA 2004) consider all the relevant circumstances immediately prior to the disposition property (year by year – Cassidy) considering: whether the TP have established on BOP that without the area of land for which they contend constitutes the subadjacent and immediately continuous land component of their housing unit they could not practically have used and enjoyed the unit as a residence (Rode v MNR TCC 1985)

(2)where the zoning by-laws dictate a minimum parcel more than ½ hectare, the PRE can be taken on the entire parcel as the excess will be considered necessary (Canada v Yates)

(3)where zoning bylaws change from a larger than ½ hectare to allow a ½ hectare, the excess will be calculated under the PRE for the period the zoning bylaw considered the excess as part of the PR year by year (Cassidy)

(4)where you have more than ½ hectare and excess changed you do the calculation of the ½ portion and the excess separately (Cassidy)

iii) n.b. where you found TPs are successful is in rural areas where the house has been built quite a long way from the road, and so the driveway is necessary to use the house as a residence

3) requirements to get PRE a) owned in the year by the TP of a PR (s. 54) which requires:

i) type of property such as61

(1)a housing unit (s. 54), which the CRA has accepted could include (s. 2.7 + ITF S1-F3-C2)(a)a house;(b)an apartment or unit in a duplex, apartment building or

condominium;(c) a cottage;(d)a mobile home;(e)a trailer; or(f) a houseboat

(2)a leasehold interest in a housing unit (s. 54); or(3)a share of the capital stock of a cooperative housing corporation

(s. 54)ii) n.b. for JTs, can each designate their undivided half interest for that

PR for that year – but one JT cannot claim PRE for one property and the other JT claim a PRE for another one

b) TP must be individual, other than a trustc) housing unit ordinarily inhabited in year by TP or his/her

spouse/CLP/child – s. 54(a)i) ordinarily inhabiting does not require a huge amount of time spent in

the particular housing unitii) if you left your personal stuff there, and you have access to it at all

time, it is probably your ordinary place of residenceiii) n.b. changing def. of spouse/CLP over time makes application of this

rule tricky – always check what year the TP declared the PR and which def. of spouse applies

d) within ½ hectare unless excess is necessary for use and enjoyment of land – s. 54(e) (Rode Test)

e) proper designation (s. 54(e)) only 1 property can be designated for PRE per family

4) if a TP buys, renovates, occupies, and sells a series of PR over the years, the houses may become a ACTN and no longer be exempt (Isaaks v The Queen, TCC 2001 + s. 2.6 Income Tax Folio S1-F3-C2 Principal Residence)

5) calculating PRE (s. 40(2)(b))a) recall s. 40(1) tells you how to calculate CGb) s. 40(2)(b) is one of the limitations – where TP is an individual, TP’s gain

for tax year from disposition of PR after Dec. 31 1971, the gain is the amount determined by the formula:i) PRE = (A × B)/Cii) CG after PRE = A – (A × B)/Ciii) A = CG otherwise determined, s .40(1) POD – ACBiv) B = 1 + the # of tax years ending after the acquisition date for which

the property was the TP’s PR and during (means at any time in and not throughout) which TP was resident in Canada (note that both these conditions must be satisfied for a particular year in order for that year to qualify for inclusion in variable B)

v) C = # of tax years ending after the acquisition date during which the TP owned the property (whether jointly with another person or otherwise)

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(1)there may be some years where you owned property where you did not ordinarily inhabit it, or you were not resident in Canada

c) s. 40(4) – where there is a spousal rollover, a spouse is deemed to have owned the property throughout the period in order to claim full ACB

6) policy = idea is that you do not invest in your house, you live in it; if there was CG on sale of ordinarily residential property, it would inhibit the housing market unduly; encouraging people to move for work or other reasonsa) however, has an indirect effect of increasing house prices – people more

willing to buy houses, b/c it is seen as kind of a tax-free investmentCassidy v The Queen, FCA 2011 – in determining PRE for more than ½ hectares where zoning laws have changed, one makes 2 separate calculations: 1) calculate ½ hectare for full PRE time and 2) calculate excess for years up to when zoning changedFacts: T acquired a house on 2.43 hectares, which due to zoning laws was the minimum sized lot until law changed in 2003; with zoning law change and ability to rezone and subdivide, T sells property and claims CG under PREHeld: per Canada v Yates, FCTD 1983, a PRE can be taken on more than ½ hectare where zoning by-law

imposes larger size and the excess will be considered as necessary 2 separate calculations for determining PRE for more than ½ hectares where zoning laws changed this way the PRE for the excess during the zoning restriction can be exempted the determination of variable B requires a determination, for each taxation year in which the TP

owned the property in issue, as to whether the property met the definition of “principal residence” of the TP for that taxation year

Depreciable Property and Capital Cost Allowance1) a TP has the option to deduct an amount to reflect depreciation under the

title of CCA for business or property – s. 20(1)(a) [n.b. CCA does not apply to PUP]

2) CCA recognizes that assets used to earn income from business/property depreciate in FMV the longer you use/own them b/c of wear and tear, age etc., and that this as an actual cost of carrying on the business

3) depreciation = accounting term for loss in value of certain assets attributable to their use in the income-earning process

4) depreciable property (s. 54) = any fixed capital property that loses value through use in the income-earning process and is not consumed immediately such as inventory (see exclusions)

5) tax definition for depreciable property = that which can have CCA deduction (s. 13(21))a) thus, if the depreciable property is included in Schedule II, CCA can be

claimed on themb) maximum statutory rates of depreciation per class are found in ITR s.

1100c) amounts allowed by the Regulations are deductible regardless of

whether they reflect the actual depreciation of the assets involved6) CCA usually uses the declining balance method of depreciation, except for

leasehold interest, patent, concession, franchise, or license where straight line method used

7) exclusionsa) inventory – ITR 1102(1)(b)b) land – ITR 1102(2)

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c) no deduction is permitted for expenditures that are not for the purpose of earning income or that are of a personal nature – ITR 1102(1)(c)i) to determine whether property is exempt under ITR 1102(1)(c), the

court will look to the TP’s intention with the propertyii) where property is intended to be torn down for expansion purposes,

they will not be considered to be acquired for the purpose of gaining or producing income and will not be subject to CCA (Ben’s Ltd)

iii) to determine whether property is for the purpose of gaining or producing income, court will look to TP’s intention with the property (Ben’s Ltd)

8) pooling classes and separate classesa) all assets in respect of a particular business that are within a particular

class are to be pooled together and the CCA is claimed on the entire class or pool

b) exceptions to the pooling requirementi) different classes of assets within a single business are separateii) classes of assets that are the same but within different businesses

must be separated (ITR 1101(1))9) UCC

a) as CCA is a permitted deduction, the TP does not have to claim it in a given tax year and may defer it to subsequent year (but that will be limited to the maximum % write down cost per the Regulations (UCC) and cannot double up the CCA in a later year)

b) policy = incentive to invest in faster CCA rate property as businesses can claim more depreciation expenses more quickly

Ben’s Ltd v MNR, EXCH 1955 – to determine whether property is for the purpose of gaining or producing income, the court will look to the TP’s intention with the property; where property is intended to be torn down for expansion purposes, they will not be considered to be acquired for the purpose of gaining or producing income and will be excluded from CCA deductionsFacts: T owned and operated bakery in Halifax; purchased 3 residential properties, each with land and house; all 3 cost a bit less than $43,000; 6 months later, T sold the 3 properties for $1200 total; for T’s tax return, he allocated the cost of the 3 properties $3000 to land, and the rest to houses; claims CCA on the houses; MNR challenged that the entire purchase price was really for the land, and no portion should be allocated to the buildingIssue: were the houses and land deductible under CCA? was the houses acquired by T for purpose of gaining or producing income from business?Held: sole intention was to tear down houses, therefore the houses were not subject to CCA even though there was some incidental rental income from existing leases

Undepreciated Capital Cost – s. 13(21)1) amount of CCA deduction under s. 20(1)(a) is determined by Reg. 1100(1)

(a) and is equal to the appropriate % of UCC of each class of depreciable assets

2) timing of CCA deduction = end of the year3) CCA = UCC × class % = the max. claim allowed under this Act4) calculation of UCC (s. 13(21))

a) year end (unless half year rule applies) UCC = (A + B) - (E + F)b) A = total historical CC of all assets ever in the classc) B = total recapture from beginning of the classd) E = all CCA ever claimed for the classe) F = POD of assets in the class up to their original CC (cannot be over)

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5) UCC is therefore cumulative and to calculate for a particular year, just take previous years UCC – CCA claimed + cost of new purchases in that year – POD (up to cost) of property disposed in that year

Half-Year Rule – ITR 1100(2)1) the rule = UCC otherwise determined – ½(acquisitions-dispositions)

a) i.e. the 1st year you buy/own an asset, you can only claim 50% of depreciation for that year

2) the rule only applies if you have a new acquisition in the year, and the acquisitions > dispositions

3) as CCA is deducted at the end of the year, to overcome the inequality of claiming assets late in the taxation year for the full year’s allowance, there is a half-year rule in ITR 1100(2), which deems assets in the year of acquisition to be used for 6 months

4) thus, CCA on new assets in the class is only 50% of a usual full year deduction where purchases > POD (up to cost)

ex. where one acquires a $100k building that is CCA class 1 (4%)year 1 End UCC = (100k + nil) – (nil + nil) – ½ ($100k – nil) = $50kCCA = $50k x 4% = $2k

Recapture: s. 13(1) – Inclusion in Computing Income1) occurs in the rare situation where the depreciation claimed > actual

depreciation in value2) when you get negative amount at end of year before claiming CCA, you

know you have a recapturea) an over-allowance of deducting CCA is adjusted via recapture which is

included as variable B or as business/property incomeb) an under-allowance is adjusted via a mandatory terminal loss deduction

when the class is empty3) UCC can never be negative, so the negative balance is recaptured and

included into business/property income s. 13(1)4) s. 13(1) applies where at the end of the tax year the aggregate of the total

depreciation allowed to the TP and the lesser of the POD and CC of the property > the CC of the property

5) recapture may occur even if there are assets left in the class6) recapture can be deferred by purchasing another asset of the same class

for an amount that > the recapture amountTerminal Loss – ss. 20(16) & 39(1)(b)(i)

1) terminal loss is a required deduction (i.e. no option)2) where an asset actually depreciates at a rate faster than the relevant CCA,

the terminal loss is fully deductible3) terminal loss only can be deducted if there are no assets in the class at the

end of the year4) deduction allowed under s. 20(16) where

a) A + B is > than E + F; andb) the class is empty

5) n.b. TP cannot claim CL on depreciable property – s. 39(1)(b)(i)

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